Posted: 28 Jul 1998
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: 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