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An empirical investigation of leveraged recapitalizations with cash payout as takeover defense.

* We examine 42 leveraged recapitalizations by firms under threat of takeover during the mid and late 1980s. A typical leveraged recapitalization (hereafter, "recap") involves a debt-financed special dividend by a firm to its equityholders. In addition, most recaps allow management to increase shareholdings in lieu of the cash payout. Occassionally the cash payout is a large proportion of the firm's total equity and results in close to 100% debt-financed firm. Four hypotheses merit consideration:

(i) Management Entrenchment: a recap, like several other takeover defenses, is an attempt by management to entrench itself at a cost to its shareholders. Past empirical work on defensive strategies such as compromise restructurings, poison pills and block repurchases, has concluded that, on average, such strategies result in shareholder wealth reduction.(1)

(ii) Restructuring: A recap increases leverage, a disciplining mechanism, and the incentive of the managers to perform better in the long run. Higher anticipated leverage and higher insider holdings affirm that the firm expects to achieve consistently high future earnings. In the long run, management is willing to face the challenge and the discipline imposed by debt. Further, the cash payout reduces discretionary cash at the disposal of management, imposing further discipline. This is excellent news about the long-run future prospects of the firm. Ex-ante, the value of the firm, and particularly shareholder value, increases.(2)

(iii) Speculative Markets: Recaps increase shareholder value since there is an immediate prospect of cash disgorgement by incumbent management. In the bidding war between management and the raider, there are both public gains (reflected in prices) and private gains to each management team. The private gains can be extracted by shareholders during the course of the bidding war. A recap announcement increases the prospects of such cash gains. It is not clear whether such strategic game-playing by the management teams maximizes shareholder wealth in the long run.(3)

(iv) Bondholder Wealth Expropriation: Recaps result in wealth transfer from bondholders to shareholders. Actions on the part of management that increase

leverage to high levels are likely to reduce the wealth of existing bondholders, and result in a wealth transfer to existing shareholders.

We study common stock price reactions of 42 firms that proposed recaps during the period January 1984 to April 1989. We also examine a sample of the traded bonds of these firms and their response to the announcement. We follow firms that completed recaps to assess actual changes in leverage and insider holdings, and their subsequent performance. For firms taken over before the implementation of a recap, we examine the bidding process to assess the impact, if any, of the proposed recap.

Our findings indicate that recap announcements resulted, on average, in a significant positive two-day abnormal return of 5.52% for shareholders. Bondholders earned negative returns over the two-week period subsequent to the announcement. Their returns, though, were not significantly different from zero at the recap announcement. Twelve firms were eventually taken over before they completed the recap and for these firms the final bid exceeded the bid just prior to the recap announcement by 10.76%. It exceeded the analysts' estimate of recap value by 5.97%. Twenty-seven firms completed the recap resulting in an actual leverage increase by 6.01 times the original leverage and an insider holdings increase by 3.03 times the original holdings. A follow-up of performance of firms that completed a recap indicates that most of them sold assets to reduce leverage in subsequent years, including ten firms that actually improved performance over those years. At least three firms temporarily suspended dividends or restructured interest payments and five changed CEOs.

In an attempt to distinguish between the restructuring and speculative market hypotheses, we run cross-sectional regressions on the two-day abnormal returns. Our results indicate that the stock price reaction is directly related to the proposed cash payout and not to the proposed change in leverage. This is supportive of the hypothesis that the market reacts to the prospect of extracting higher immediate gains (in the form of cash payout) from either the management team or a competing bidder. The long-term disciplining effect of leverage does not appear to be foremost in the minds of the investors.

In Section I, we discuss the institutional details and the relevant economic issues. In Section II, we document the impact of a recap announcement on stockholder and bondholder wealth. We present a cross-sectional analysis of the two-day announcement returns in Section III. Our conclusion appears in Section IV.

I. Leveraged Recapitalizations With

Cash Payouts, and Takeover

Defense

The leveraged recapitalizations we examined involved unusually large cash payouts to shareholders where the cash was typically raised through issuing debt. The details of individual leveraged recapitalizations tended to be firm-specific and complex. Exhibit 1 summarizes important aspects of a recap for the 42 individual firms. In general, all or part of the shares outstanding were exchanged for cash and/or debt and a full or fraction of a "new" share (referred to as a stub).

[TABULAR DATA OMITTED]

An important feature of these recaps is that many times management did not avail itself of the cash payout for their share of the stockholdings or stock options. The deal was usually structured so that management and ESOPs were forced to accept new shares. This arrangement meant that management's proportion of equity interest was significantly increased following a recap.(4)

Four economically important features of a typical recap deal were (i) the presence of a takeover threat, (ii) proposed cash payout (at times accompanied by debt securities) to shareholders, (iii) proposed leverage increase, and (iv) increase in shareholdings of management and employees.

Evidence on the proposed leverage change and the cash payout also appears in Exhibit 1. Leverage change is defined as the ratio of total proposed borrowings to market value of equity, where the stock price used to value equity is from one week prior to the recap announcement. Similarly, cash payout is defined as the ratio of total proposed cash component of the payout to equity value. Proposed cash payouts by firms announcing recaps averaged 60.4% of the pre-recap equity value. On average, firms proposed to borrow 66.2% of the value of equity to finance a recap. This amount exceeded 100% of equity value in some cases.

We have followed the history of firms after a recap proposal was announced, as shown in Exhibit 1. Twelve of the 42 firms were taken over prior to the completion of a recap. Three firms abandoned the recap plan before completion. Twenty-seven firms successfully completed a recap. Two of the 27 firms were taken over after successfully completing a recap. Of the remaining 25, most firms sold assets in the ensuing years, primarily to reduce debt. Five firms got into financial problems resulting in a change of CEOs. Three firms either restructured interest payments of temporarily suspended dividends. Ten firms did improve performance after a recap, although they too resorted to the sale of assets to reduce the debt burden.

For the 12 firms that were taken over prior to implementation of the recap plan, the final bid exceeded the bid just prior to recap announcement by 10.76%. It exceeded the estimated recap value by 5.97%.(5) These results support the speculative markets hypothesis that game-playing by incumbent management was effective in inducing higher bids from raiders.

The median firm of the firms that eventually completed a recap proposal (27 out of the total sample of 42 firms) experienced an actual change in leverage by 6.01 times the original leverage, and an actual change in insider holdings by 3.03 times the original holdings upon completion of the recap plan. This indicates that the incumbent management was prepared to drastically alter the firm's capital structure at least temporarily when it proposed a recap. In the long run, though, almost all such firms attempted to reduce debt, including the firms that performed relatively well.

II. Wealth Effects of Leveraged

Recapitalizations

A. Impact of a Recap Announcement on

Stock Price

We partition the 42 firms into firms that faced an active takeover threat and firms that faced a potential threat. A firm is classified as an active takeover target if one bidder is clearly identified in a Wall Street Journal news report at or prior to the recap announcement. A firm is classified as a potential takeover target if the Wall Street Journal news report mentions a likely takeover attempt as the reason for the proposed recap without a bidder being identified yet. Subsamples of firms are examined because the announcement of a recap deal by a firm that is not under an active takeover threat, is likely to contain information on the possibility of a takeover. Hence, the stock price response would be due, in part, to information about future takeover activity and due only partially to the recap proposal. Daily average abnormal returns are calculated separately for 31 firms that were under an active takeover threat, for 11 firms that were under a potential takeover threat, and for both the subsamples together.

The effect of a recap announcement on the stock price is reported in Exhibit 2. The 31 firms under active takeover threat experience positive abnormal returns over the entire period from day-60 to the announcement day, probably due to takeover activity. This results in a cumulative abnormal return of 23.39% between day -60 and day 15. During the period -15 to 0 there are several days on which significant positive abnormal returns accrue to these firms. The returns stabilize a few days after the even day and decline somewhat in the period 45 to 60 days after the recap announcement. Hence, there is a significant run-up in stock prices prior to the announcement of a leveraged recap by firms under an active takeover threat. On day -1 an abnormal return of 1.19% accrues (t-statistic 3.45) and on day 0 an abnormal return of 2.16% accrues (t-statistic 6.27). Over the two-day period, there are significant abnormal gains of 3.35% (t-statistic 6.87).
Exhibit 2. Abnormal Returns at Leveraged Recap Plan
 Announcements By 42 NYSE, AMEX and
 OTC Firms for Selected Intervals Around
 the Announcement Date
 Active Potential
 Target Firms Target Firms All Firms
 (31 firms) (11 firms) (42 firms)
 Abnormal Abnormal Abnormal
 Returns Returns Returns
 (%) (%) (%)
Day -60 to day -16 7.68 -1.98 5.15
Day -15 to day -2 11.21 0.10 8.30
Day -1 1.19** 3.88** 1.89**
Day 0 2.16** 7.77** 3.63**
Day + 1 0.37 0.28 0.35
Day + 2 to day + 15 0.78 2.20 1.15
Day + 16 to day + 60 -7.82 -3.96 -6.91
(*) Significant at the 5% level.
(**) Significant at the 1% level.


In contrast to the results reported above, the results for the 11 potential targets are different. There is no run-up in prices over the 60 days prior to announcement. In fact, on average, the firms accrue negative cumulative abnormal returns of -1.98% between day -60 and day -16. The announcement of the recap deal results in a larger positive stock price reaction. On day -1 there is a positive abnormal return of 3.88% (t-statistic 6.23) and on day 0 there is a positive abnormal return of 7.77% (t-statistic 12.50) resulting in a two-day effect of 11.65% (t-statistic 13.22). In the period following the recap announcement, the stock price stabilizes at the new level. Finally, for the total sample the stock price response on day -1 is 1.89% (t-statistic 6.47) and for day 0 is 3.63% (t-statistic 12.45) resulting in a two-day abnormal return of 5.52% (t-statistic 13.39). During days -1 and 0, positive abnormal returns accrue to 74.19% of the subsample of firms under active threat, 90.91% of the subsample of firms under potential threat, and 78.57% of the total sample.(6) This difference in performance of the active versus potential targets is entirely attributable to the fact that the firms under active takeover threat were already in play prior to the recap announcement. The firms under potential threat of a takeover were not in play before the recap announcement. This meant average performance prior to the announcement and more of a speculative response upon recap announcement.

The positive two-day abnormal return to stockholders is at odds with the negative stock price reaction documented at the announcement of other defensive measures such as restructurings, poison pills and block repurchases by target firms. The results do not support the management entrenchment hypothesis. Two important characteristics of leveraged recaps distinguish them from other defensive measures. First, most leveraged recapitalizations require a vote by stockholders before being implemented. Of the 42 recap proposals announced, 25 were subject to stockholder vote. As opposed to this, defensive measures such as poison pills and restructurings usually do not require such a vote. For example, Dann and DeAngelo [2, p.88] report that "managers voluntarily put their planned restructurings to a stockholder vote in only one of 39 cases and sometimes went to great lengths to avoid doing so." Second, leveraged recaps imposed high costs on incumbent management in case they are completed. The explicit costs to incumbent management are large shareholdings in a levered firm with little discretionary cash at their disposal. A manager facing a takeover threat is likely to choose to resist it with a leveraged recap only if there is a good probability of being able to survive through a difficult period with low cash availability and high interest expenses.

B. Bondholder Wealth

Wealth expropriation from bondholders is a frequently cited motive for managerial action. In the case of a leveraged recap, there is a cash payout to stockholders and a large increase in leverage. This may result in a wealth transfer from bondholders to stockholders if the expropriation was unanticipated by the bondholders, thereby decreasing current bondholder wealth.

Nineteen firms, out of a total of 42 firms that announced a recap, had traded bonds outstanding that were listed on the Interactive Data Company database at the time of announcement. The bond sample was selected from the traded bonds of these 19 firms. In case a firm had more than one traded bond, a maximum of two were selected. This sampling procedure yielded 26 traded bonds.

Data on bond prices was gathered from the Interactive Data Company's security service. In general, infrequent trading of bonds makes it difficult to measure bond returns.(7) For purposes of this study, special care was taken to measure returns correctly. Bond prices used for estimating returns were actual trade prices and not bid or ask prices. The returns are computed using the following expression:

[R.sub.it] = ([P.sub.it] - [P.sub.it] - 1) + [K.sub.t]([coup.sub.i]/365)/ [P.sub.it] - 1 + [accint.sub.it]-1 (2) where [R.sub.it] is the return on bond i for day t, [P.sub.it] is the price at which bond i traded on day t, [coup.sub.i] is the annual coupon payment on bond i, and [accint.sub.it-1] is the accumulated interest on bond i from last coupon payment till t-1.

In case three was no trade on a particular day, bond price change was taken to be zero. Abnormal returns for the bonds were computed using mean-adjusted returns. Calculating the mean-adjusted return involved computing an estimated mean return over an estimation window and using it as a benchmark to compute the mean-adjusted return on a particular day. For this purpose, an estimation window of 30 days from -30 to -16 days and from + 16 to +30 days was used. The returns were examined for an event period of -15 + 15 days around the announcement day. On any particular day within the event period, the abnormal return on the bond was estimated by subtracting the actual return from the estimated mean. Average abnormal returns for each of the 30 days were obtained using only the bonds that traded on a particular day (rather than all bonds).

Exhibit 3 presents average mean-adjusted bond returns for the traded bonds in the sample for selected intervals over the 30 days surrounding the announcement of a recap. The bonds earned negative returns over all intervals reported except for day -1. For the six bonds that traded on day -1, the bondholders earned a significantly positive abnormal return of 3.36% (t-statistic 4.32). The average two-day bond return for traded bonds on days -1 and 0 was 3.00% (t-statistic 2.73). Given the infrequent trading in the bonds, though, not too much should be read in these numbers. It is more than likely the sample of bonds that traded in the two-day window were precisely the bonds that gained from the recap plan.(8) Overall, during the interval -15 to + 15 the bonds earned a negative return of -6.15%. Even though this return was not significant, it is indicative of a decline in bond value over the period. In the end, it can be said that bondholder wealth declines, although the decline is not statistically significant. It is also fair to conclude that there is partial support for the bondholder wealth transfer hypothesis.
Exhibit 3. Abnormal Returns for 26 Sample Bonds of
 19 Firms That Announced Plans for Leveraged
 Recapitalization for Selected Intervals
 over 15 Days Before and After Announcement
 Abnormal Average Number
 Returns of Traded Bonds
 (%) Per Day
Day-15 to day-11 -0.14 8
Day-10 to day-2 -1.22 8
Day-1 3.66** 6
Day 0 -0.36 11
Day + 1 -1.81* 7
Day + 2 to day + 10 -2.80 10
Day + 11 to day + 15 -3.18 8
Day-15 to day + 15 -6.15 9
(*) Significant at the 5% level.
(**) Significant at the 1% level.


III. Cross-Sectional Analysis of

Abnormal Shareholder Returns

A cross-sectional analysis of two-day abnormal returns to shareholders was conducted. The objective of the analysis was to attempt to distinguish between the restructuring and the speculative markets hypotheses. The restructuring hypothesis argues that the leverage increase proposed by management serves as a disciplining mechanism in the long run and this results in a positive stock price reaction. The speculative markets hypothesis emphasizes the immediate disgorging of cash by management as the cause of the positive stock price reaction. The hypothesis is consistent with target-bidder game-playing and the attempt of outside investors to extract the maximum private benefits from the winning management team. We were also interested to see if the abnormal returns were significantly different for subsamples of firms under active as opposed to potential threat of takeover, and for subsamples of proposals which required shareholder vote as opposed to no shareholder vote.

To conduct these tests, we regressed the announcement period abnormal returns, days -1 plus 0 (denoted by AR), on four independent variables. The first two variables were proposed leverage change (LEV) and proposed cash component of the payout (CASH) as reported in Exhibit 1. A dummy variable (THREAT) took the value one for firms under active takeover threat and zero otherwise. Finally, a dummy variable (VOTE) took the value one for recap proposals subject to shareholder vote and zero otherwise. The estimated OLS regression model is:

AR = 5.355 CONST + 0.039 LEV + 0.173 CASH

(3.57) (0.85) (3.29)

- 9.608 THREAT - 4.062 VOTE

(-2.60) (-1.05) (2)

[R.sup.2] = 44.4%

The regression results indicate that proposed leverage change does not have a significant effect on the level of the abnormal return. As opposed to this, the proposed cash payout does, indeed, have a significant positive effect on the level of the abnormal return. This evidence is consistent with the speculative markets hypothesis. The stock price response seems to be for immediate short-term benefits and may or may not be consistent with long-term shareholder welfare. These short-term benefits, that accrue to existing stockholders in the form of cash, are not inconsistent with market efficiency. Rather, the evidence can be interpreted as consistent with the hypothesis that the market is able to extract private benefits from the winning management team (as in Stultz [14], and Harris and Raviv [8]). Further, the results indicate that firms under active takeover threat have a significantly less positive abnormal return. This confirms our earlier findings that the behavior of stock prices around the announcement of a recap proposal is different for firms under an active takeover threat than for firms under a potential takeover threat. Finally, for the sample of firms we considered, the requirement that the shareholders approve the proposal does not significantly affect abnormal returns.

IV. Conclusion

The evidence on stock and bond price response at announcement of a recap is consistent with the hypothesis that recaps enhance the value of a firm. In particular, shareholder wealth increases around announcement and bondholder wealth does not appear to be significantly affected. The positive two-day abnormal return to stockholders at the announcement of a recap is contrary to the negative stock price reaction found at the announcement of other defensive measures such as restructurings, poison pills and block repurchases by target firms.

To the extent that the restructuring hypothesis implies that reduction in discretionary cash available to management is a disciplining mechanism, our evidence is consistent with this hypothesis. But future actions by managements who succeed in recapitalizing, such as asset sales and attempts to reduce leverage, are indicative that restructuring is not the primary managerial motive. The evidence is more supportive of the speculative markets hypothesis that there is a bidding war in progress and the stock price reaction is primarily a response to the cash payout. Cross-sectional results reveal that the amount of cash proposed to be paid out, not leverage, is the key determinant of the stock price response. Moreover, the 12 firms that are acquired before recap completion at improved bids, reaffirms a bidding war in progress. Finally, for the firms that survive acquisition, actual performance after recap implementation is not exceptional but rather mixed. There is an initial increase in leverage at the completion of a recap. All firms prefer to subsequently unload debt irrespective of performance. This indicates that the capital structure adopted at recap completion is neither optimal nor sustainable. All of this points to game-playing by management to survive acquisition, extraction of private benefits by the shareholders in the meantime, and an attempt to resort to more desirable levels of debt and holdings subsequently.

(1) For work related to takeover defense and management entrenchment see, for example, Dann and DeAngelo [2], Denis [4], Jarrell and Poulson [9], DeAngelo and Rice [3], Linn and McConnell [11], Ryngaert [13], and Malatesta and Walkling [12]. (2) For example, see Jensen [10] who conjectures that restructurings involving increased leverage and increased management holdings, result in shareholder wealth maximization. Also see Donaldson [5] who discusses the implications of discretionary cash available to management. (3) For example, see Stulz [14], and Harris and Raviv [8]. The hypothesis does not preclude market efficiency because the market reacts positively to the prospect of extracting private gains from the winning management team. The recap itself may or may not enhance shareholder wealth in the long run. (4) This characteristic of leveraged recaps is similar to the "vote consolidation" defenses analyzed by Dann and DeAngelo [2]. (5) Estimated recap value refers to the value of the recap plan estimated by the analysts and reported in Wall Street Journal at the time of announcement. (6) We conducted a binomial proportions test and a Wilconxon signed-rank test on the two-day announcement day effects. The null hypothesis under the binomial proportions test is that the proportion of positive two-day abnormal returns is less than or equal to one-half. The binomial proportions test rejected the null with ap-value of 0.001. The null hypothesis under the Wilconxon signed-rank test is that the sum of the signed ranks of positive abnormal returns is less than or equal to the expected signed ranks from a random distribution of positive and negative signed ranks. The Wilconxon signed-rank test rejected the null with ap-value of 0.001. (7) For example, infrequent trading in bonds makes it necessary to assume either continuous accumulation of returns on days with no trades or jumps in returns with zero returns on days with no trades. See Handjinicolaou and Kalay [7], and Eger [6] for a detailed discussion on measurement of bond returns. (8) Given the difficulties associated with bond return measurement, we also used an alternative method to measure bond returns. Windows were formed around days-1 and 0 and, for each bond, a trade closest to these two days on each side was identified. Ten bonds traded in a two-day announcement window and yielded an average buy-and-hold return of 0.03%. We conducted a Wilcoxon signed-rank test to test the null hypothesis that the sum of the signed ranks of positive abnormal returns was equal to the expected signed ranks from a random distribution of positive and negative signed ranks. The test failed to reject the null hypothesis with a p-value of 0.3848.

References

[ 1.] S. Brown and J. B. Warner, "Using Daily Stock Returns: The Case

of Event Studies," Journal of Financial Economics (March 1985),

pp. 3-31. [ 2.] L. Y. Dann, and H. DeAngelo, "Corporate Financial Policy and

Corporate Control: A Study of Defensive Adjustments in Asset

and Ownership Structure," Journal of Financial Economics

(January-March 1988), pp. 87-127. [ 3.] H. DeAngelo and E.M. Rice, "Antitakeover Charter Amendments

and Stockholder Wealth," Journal of Financial Economics

(April 1983), pp. 329-359. [ 4.] D.J. Denis, "Degensive Changes in Corporate Payout Policy:

Share Repurchases and Special Dividends," The Journal of

Finance (December 1990), pp. 1433-1456. [ 5.] G. Donaldson, Managing Corporate Wealth, New York, Praeger,

1984. [ 6.] C.E. Eger, "An Empirical Test of the Redistribution Effect in

Pure Exchange Mergers," Journal of Financial and Quantitative

Analysis (December 1983), pp. 547-572. [ 7.] G. Handjinicolaou and A. Kalay, "Wealth Redistributions or

Changes in Firm Value: An Analysis of Returns to Bondholders

and Stockholders Around Dividend Announcements," Journal

of Financial Economics (March 1984), pp. 35-63. [ 8.] M. Harris and A. Raviv, "Corporate Control Contests and Capital

Structure," Journal of Financial Economics (January-March

1988), pp. 55-86. [ 9.] G.A. Jarrell and A.B. Poulsen, "Shark Repellents and Stock

Prices," Journal of Financial Economics (March 1987), pp. 127-168. [10.] M.C. Jensen, "Eclipse of the Public Corporation," Harvard Business

Review (September-October 1989), pp. 61-74. [11.] S.C. Linn and J. McConnell, "An Empirical Investigation of the

Impact of Antitakeover Amendments on Stock Prices," Journal

of Financial Economics (April 1983), pp. 361-399. [12.] P.H. Malatesta and R.A. Walkling, "The Impact of Poison Pill

Securities on Stockholder Wealth," Journal of Financial

Economics (January-March 1988), pp. 347-376. [13.] M. Ryngaert, "The Effect of Poison Pill Securities on

Shareholder Wealth," Journal of Financial Economics (January-March

1988), pp. 377-418. [14.] R. M. Stulz, " Managerial Control of Voting Rights: Financing

Policies and the Market for Corporate Control," Journal of

Financial Economics (January-March 1988), pp. 25-54.

Appendix

A. Sample Selection

An initial sample of firms was constructed by scanning the Dow Jones News Retrieval Service for the period January 1984 to April 1989. A firm was include in the sample if it proposed a leverage-increasing capital structure change with a cash and/or debt payout to all or a fraction of the existing shareholders. The term leveraged recapitalization or restructuring was frequently associated with such an announcement. Alternatively, the announcement referred to a special dividend, a buyback or a swap. This procedure yielded an initial sample of 196 firms.

The initial screening was followed by a search of the Wall Street Journal Index for a news report on the proposal. This eliminated 35 firms for which there was no news report in the Wall Street Journal. The news report in the Wall Street Journal was scanned to identify firms in the initial sample that were under a takeover threat. A firm was considered to be under an "active" takeover threat if at least one bidder was clearly identified in the Wall Street Journal news report or in a prior Wall Street Journal news report on the firm. For such cases, in general, at least one bid had already been received by the target. A firm was considered under a "potential" takeover threat if, in the Wall Street Journal news report, a likely takeover attempt was explicitly recognized as the main reason for the proposed recap without a bidder being clearly identified. We eliminated 64 firms for which the news report made only a passing reference to a recap plan as one option before the firm, without a definite proposal being announced. An additional 17 firms were eliminated because they announced "targetted" buybacks in which all shareholders were not allowed to participate. Also, 7 firms turned out to be LBO proposals and were not included in the final sample. Finally, 31 firms proposing special dividends, repurchases, or leverage-increasing changes did not mention a takeover threat. This procedure yielded a final sample of 42 firms.

B. Abnormal Return Measurement

The effect of leveraged recaps on shareholder wealth is estimated by computing abnormal returns to the common shareholders around the date when the news was first reported in the Wall Street Journal. Daily returns are obtained for 200 days before each event (labelled as days -200 to -1), on the event day (labelled as day 0) and 60 days after the event (labelled as days 1 to 60). Return date is obtained from the CRSP daily return file or from the Interactive Data Company (IDC) database depending on availability.

Daily average abnormal returns are obtained for the 120 days surrounding the event using the linear market model. Market model estimates are obtained using an estimation period from days -200 to -61. These are used to obtain benchmark and daily abnormal returns for the 120 days surrounding the event. Daily average abnormal returns refer to cross-sectionally averaged daily abnormal returns. These returns are tested for significance using the t-statistic (see Brown and Warner [1] for details).
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Title Annotation:Topics in Capital Restructuring
Author:Handa, Puneet; Radhakrishnan, A.R.
Publication:Financial Management
Date:Sep 22, 1991
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