Leveraged Recapitalizations, Operating Efficiency, and Stockholder Wealth

Posted: 28 Jul 1998  

M. Mark Walker

University of Mississippi - Department of Finance

Abstract

This research investigates the role that leveraged recapitalizations (recaps) play in disciplining inefficient managers. Accounting ratios are used to evaluate firm operating profitability and efficiency. Matched-firm-adjusted returns are used to assess stock market performance. Pre-recap and post-recap performance are evaluated separately. The results reveal that 1) recap managers are at least as efficient as matching non-recap managers prior to recapitalization, 2) recaps do not improve operating profitability and efficiency, and 3) increases in stockholder wealth around recap announcements are transitory. Further analysis indicates that post-recap stock price performance is correlated negatively with the recap-induced change in leverage.

JEL Classification: G12, G14, G32, G34

Suggested Citation

Walker, M. Mark, Leveraged Recapitalizations, Operating Efficiency, and Stockholder Wealth. The Financial Review, August 1998. Available at SSRN: https://ssrn.com/abstract=90828

Milan Mark Walker (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-7721 (Phone)
662-915-5821 (Fax)

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