Leveraged Recapitalizations, Operating Efficiency, and Stockholder Wealth

M Mark Walker

The Financial Review, 1998, vol. 33, issue 3, 99-114

Abstract: This research investigates the role that leveraged recapitalizations (recaps) play in disciplining inefficient managers. Accounting ratios are used to evaluate firm operating profitability and efficiency. Matched-firm-adjusted returns are used to assess stock market performance. Pre-recap and post-recap performance are evaluated separately. The results reveal that 1) recap managers are at least as efficient as matching non-recap managers prior to recapitalization, 2) recaps do not improve operating profitability and efficiency, and 3) increases in stockholder wealth around recap announcements are transitory. Further analysis indicates that post-recap stock price performance is correlated negatively with the recap-induced change in leverage. Copyright 1998 by MIT Press.

Date: 1998
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