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Valuing the Process of Corporate Restructuring

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  • Audra L. Boone

    (Penn State University)

  • J. Harold Mulherin

    (Claremont McKenna College)

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    Abstract

    We study the process of corporate restructuring for a sample of 298 firms during the 1989-98 period that announce that they are considering restructuring alternatives. We find that restructuring is a lengthy process, with the majority of the restructuring period occurring prior to any definitive proposals for corporate change. Only 70 percent of the firms that initially propose restructuring later make a definitive proposal to sell either all or part of the firm, with other firms taking themselves out of play or declaring bankruptcy. Hence, the market reaction to the initial restructuring announcement underestimates the full wealth effects of completed restructurings. The estimate of the full value of restructuring across the sample firms averages 7.5 percent, with the greatest gains of 30 percent accruing to firms that are acquired. The average gain for the full restructuring period for firms divesting a unit is 5 percent, which is roughly double that estimated for the initial announcement in prior studies of corporate divestitures.

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    Bibliographic Info

    Paper provided by Claremont Colleges in its series Claremont Colleges Working Papers with number 2001-22.

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    Date of creation: May 2001
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    Handle: RePEc:clm:clmeco:2001-22

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    1. Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
    2. Schipper, Katherine & Smith, Abbie, 1986. "A comparison of equity carve-outs and seasoned equity offerings : Share price effects and corporate restructuring," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 153-186.
    3. Malatesta, Paul H. & Thompson, Rex, 1985. "Partially anticipated events: A model of stock price reactions with an application to corporate acquisitions," Journal of Financial Economics, Elsevier, vol. 14(2), pages 237-250, June.
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    7. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    8. Bradley, Michael & Desai, Anand & Kim, E. Han, 1983. "The rationale behind interfirm tender offers : Information or synergy?," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 183-206, April.
    9. Mulherin, J. Harold & Boone, Audra L., 2000. "Comparing acquisitions and divestitures," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 117-139, July.
    10. Forsythe, Robert & Lundholm, Russell & Rietz, Thomas, 1999. "Cheap Talk, Fraud, and Adverse Selection in Financial Markets: Some Experimental Evidence," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 481-518.
    11. Mitchell, Mark L & Stafford, Erik, 2000. "Managerial Decisions and Long-Term Stock Price Performance," The Journal of Business, University of Chicago Press, vol. 73(3), pages 287-329, July.
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    13. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(2), pages 225-48, Fall.
    14. Miles, James A & Rosenfeld, James D, 1983. " The Effect of Voluntary Spin-Off Announcements on Shareholder Wealth," Journal of Finance, American Finance Association, vol. 38(5), pages 1597-1606, December.
    15. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    16. Prabhala, N R, 1997. "Conditional Methods in Event Studies and an Equilibrium Justification for Standard Event-Study Procedures," Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 1-38.
    17. Eckbo, B Espen & Maksimovic, Vojislav & Williams, Joseph, 1990. "Consistent Estimation of Cross-Sectional Models in Event Studies," Review of Financial Studies, Society for Financial Studies, vol. 3(3), pages 343-65.
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    Cited by:
    1. Mario, Cuevas, 2007. "A Practical Guide to the Assessment of the Vulnerability of the Non-Financial Private Sector," MPRA Paper 1375, University Library of Munich, Germany.

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