Equity Offerings in Financial Distress: Evidence from German Restructurings

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 creditor resulting 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 to raise new funds. However, offerings are frequently accompanied by generous debt-concessions by lending banks, 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 the market considers equity offerings an effective measure to tackle distress out-of-court.

Keywords: Financial distress, equity issues, wealth transfers

JEL Classification: G32, G33