Restructuring Vs. Greenmail In the Market For Corporate Control: The Effect On Shareholder Wealth

Abstract

The effects of shareholder wealth of the payment of greenmail versus restructuring activities to thwart hostile takeover offers were investigated and illustrated in this study. The risk premium version of the market model was used to examine abnormal security price performance relative to an event announcement for selected sample sets of companies which have employed these defense techniques. The resulting company abnormal returns were summed cross-sectionally in event-time to obtain portfolio abnormal returns for use in hypothesis testing. Evidence from prior studies is first discussed to give some insight of the effects of merger activity, capital structure changes, and greenmail announcements on shareholder wealth. Research methods and results of this analysis are then presented. Based upon the comparison of these widely used anti-takeover tactics findings suggest that the payment of greenmail entrenches management at the expense of shareholder wealth, while restructuring activity to thwart hostile offers provides significant positive returns to shareholders.