Who Acquires Toxic Targets?

We examine the consequences of environmental lawsuits in the market for corporate control. Using a sample of lawsuits filed in the U.S. federal courts, we document that environmental litigation reduces sued firms’ bidding activities during the subsequent three years. Purchasing targets that have been sued for environmental violations is value destroying for acquirers, as evidenced by their announcement‐date returns. Finally, firms with poor corporate governance are more likely to acquire such “toxic” targets. Our empirical results are robust to falsification tests using securities and contractual lawsuits, controlling for endogeneity using an instrumental variable approach, propensity score matching, employing an alternative lawsuit sample, and alternative control variables and model specifications. Our findings have significant implications for policymakers, corporate executives, and environmental interest groups.