An Empirical Investigation of Leveraged Recapitalizations With Cash Payout as Takeover Defense

We study 42 leveraged recapitalizations by takeover targets and find that the announcement is accompanied by a two-day abnormal return of 5.52% to shareholders. Bondholder wealth declines but not significantly. Cross-sectional analysis indicates cash payout is the key determinant to the stock price reaction. The findings support the hypothesis that a recap announcement is strategic game-playing by incumbent management and an attempt to outbid the raider. Overall, a recap announcement appears to be a risky strategy followed by incumbent management that may or may not be consistent with shareholder wealth-maximization in the long run.