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

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  • Puneet Handa
  • A. R. Radhakrishnan
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    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.

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    Bibliographic Info

    Article provided by Financial Management Association in its journal Financial Management.

    Volume (Year): 20 (1991)
    Issue (Month): 3 (Fall)
    Pages:

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    Handle: RePEc:fma:fmanag:handa91

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    Cited by:
    1. Renneboog, L.D.R. & Szilagyi, P.G., 2006. "Corporate Restructuring and Bondholder Wealth," Discussion Paper 2006-23, Tilburg University, Center for Economic Research.
    2. James M. Mahoney & Chamu Sundaramurthy & Joseph T. Mahoney, 1996. "The effects of corporate antitakeover provisions on long-term investment: empirical evidence," Research Paper 9618, Federal Reserve Bank of New York.
    3. Peyer, Urs C. & Shivdasani, Anil, 2001. "Leverage and internal capital markets: evidence from leveraged recapitalizations," Journal of Financial Economics, Elsevier, vol. 59(3), pages 477-515, March.
    4. Healy, Paul M. & Palepu, Krishna G., 1995. "The challenges of investor communication The case of CUC International, Inc," Journal of Financial Economics, Elsevier, vol. 38(2), pages 111-140, June.
    5. Bae, Sung C. & Simet, Daniel P., 1998. "A comparative analysis of leveraged recapitalization versus leveraged buyout as a takeover defense," Review of Financial Economics, Elsevier, vol. 7(2), pages 157-172.

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