Equity Offerings in Financial Distress – Evidence from German Restructurings

Philipp Jostarndt

Schmalenbach Business Review (sbr), 2009, vol. 61, issue 1, 84-111

Abstract: For a sample of 267 financially distressed German corporations, I analyze firms’ decision to recapitalize by raising fresh equity. I find evidence consistent with the hypothesis that wealth transfers from owners to creditors, which result from a costly debt overhang present a potential impediment to a successful private restructuring. Firms with high leverage and low future growth potential have troubles raising new funds. However, lending banks frequently accompany offerings with generous debt-concessions, which suggests that firms are able to overcome a debt-overhang in private bargains. Evidence from stock returns around equity offering announcements indicates that high wealth transfers do reduce shareholder wealth. yet, overall announcement returns are significantly positive, indicating that the market considers equity offerings an effective measure for tackling distress out of court.

Keywords: Equity Issues; Financial Distress; Wealth Transfers (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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