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Litigation exposure,capital structure and shareholder value: the case of Brooke Group
Institution:1. Baylor University, Department of Entrepreneurship, One Bear Place #98011, Waco, TX 76798-8011, United States;2. University of Utah, Department of Entrepreneurship and Strategy, 1645 East Campus Center Drive, Salt Lake City, UT 84112-9304, United States;3. Weatherford, Ltd., 2000 St James Place, Houston, TX 77056, United States
Abstract:We examine value creation and destruction in the tobacco industry due to the radical litigation strategy of Brooke Group CEO Bennett LeBow. Brooke Group had tiny market share, low margins, high leverage and highly concentrated management ownership. Beginning in 1996, the firm reached settlements in lawsuits brought against all cigarette companies by class action plaintiffs and US state governments. Brooke Group's actions, which included promises to cooperate in litigation against its rivals, spurred other companies to reach settlements on less favorable terms. These events led to massive wealth destruction within the industry but impressive returns for shareholders of Brooke Group.
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