Can 'delitigation' transform an industry?

I investigate whether removing product liability – “delitigation” – affects a firm’s market value.  This research sheds light on the influence of litigation risk on firm value.  Using the vaccine industry as an example and event study methodology, I determine abnormal returns to the licensing of 117 vaccines licensed between 1940 and 2013.  For the entire sample, average market reaction to the licensing event is essentially zero.  I then divide the sample according to whether the licensing of the vaccine occurred before or after the passage of the National Childhood Vaccine Injury Act.  The legislation, passed in 1986, preempted a consumer’s right to sue a vaccine manufacturer over most product liability. I find that after the legislation, the market value of a firm licensing a new vaccine increased an average of 1.4%.  I further analyze the licensing of 357 non-vaccine drugs over the same time period; I find that average market return also increases after the legislation, but only for firms that also make vaccines.  Returns to drug firms that do not make vaccines remain essentially zero upon the licensing of a new drug, even after the legislation.  Cross-sectional analysis of abnormal returns reveals that political contributions positively influence market reactions to the licensing of a new drug, potentially suggesting regulatory capture by the vaccine industry.  Further cross-sectional analysis of total, beta, and idiosyncratic risks reveals the market rewards a vaccine company’s risk-taking, but only after the legislation.  The market does not reward risk-taking by a company that does not make vaccines. Delitigation appears to have contributed to the transformation of vaccine makers.