Voluntary Liquidation and Stockholder Returns.

Abstract

In a liquidation the assets of a firm are sold and the proceeds are used to retire existing debt. The remainder is distributed to the stockholders as a liquidating dividend. The event can occur either with or without a bankruptcy filing. When the event is not associated with a bankruptcy process it is defined as a voluntary liquidation. This study examines the effects of announcements relating to voluntary liquidations on the wealth of the stockholders of the participating firms. Raw returns and modified Market Model residuals are used to measure three-day announcement period returns and cumulative abnormal returns over the entire liquidation process. The process of liquidation is shown to be a wealth increasing activity for the shareholders of the liquidating firms. The initial liquidation announcement, which is defined as the press date, corresponds to a 15% return with another 3% added upon stockholder confirmation. In cases where there is prior related activity (such as a divestiture, a tender offer, or a merger proposal) another 10% is at the time of the prior announcement. Significant returns of approximately 2% are also documented on both the dividend declaration date and the ex-dividend date. This latter finding on the ex-dividend date is anomalous since it cannot be attributed to either the resolution of uncertainty nor to the dividend tax effect. The acquiring firm shareholders are shown to gain only 2% during the press date period. However, since the acquiring firms are on average 6.7 times larger than the liquidating firms, a direct comparison of percentage returns is not appropriate. When this difference in size between the two firms is recognized by comparing dollar rather than percentage press date returns, the liquidating firms earn the greater return in seventeen of twenty-nine cases. This evidence suggests that the liquidating firms own the greater proportion of the specialized resources.