Causes of Financial Distress Following Leveraged Recapitalizations

Posted: 28 Jul 1999

See all articles by David J. Denis

David J. Denis

University of Pittsburgh

Diane K. Denis

University of Pittsburgh - Katz School of Business

Date Written: June 1994

Abstract

We report that 31% of the firms completing leveraged recapitalizations between 1985 and 1988 subsequently encounter financial distress. Following their recaps, the distressed firms exhibit (1) poor operating performance due largely to industry-wide problems, (2) surprisingly low proceeds from asset sales, and (3) negative stock price reactions to economic and regulatory events associated with the demise of the market for highly-leveraged transactions. The incidence of distress is not related to several characteristics that have previously been linked with poorly-structured deals. We thus attribute the high rate of distress primarily to unexpected macroeconomic and regulatory developments.

JEL Classification: G32, G33, G34, G35

Suggested Citation

Denis, David J. and Denis, Diane K., Causes of Financial Distress Following Leveraged Recapitalizations (June 1994). Available at SSRN: https://ssrn.com/abstract=5438

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Diane K. Denis (Contact Author)

University of Pittsburgh - Katz School of Business ( email )

368B Mervis Hall
Pittsburgh, PA 15260
United States
412-624-0296 (Phone)

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