An Empirical Investigation of Leveraged Recapitalizations With Cash Payout as Takeover Defense

Puneet Handa and A. R. Radhakrishnan

Financial Management, 1991, vol. 20, issue 3

Abstract: We study 42 leveraged recapitalizations by takeover targets and find that the announcement is accompanied by a two-day abnormal return of 5.52% to shareholders. Bondholder wealth declines but not significantly. Cross-sectional analysis indicates cash payout is the key determinant to the stock price reaction. The findings support the hypothesis that a recap announcement is strategic game-playing by incumbent management and an attempt to outbid the raider. Overall, a recap announcement appears to be a risky strategy followed by incumbent management that may or may not be consistent with shareholder wealth-maximization in the long run.

Date: 1991
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