A well-studied heterogeneous palladium(II) catalyst used for the cycloisomerization of acetylenic acids is known to be susceptible to deactivation through reduction. To gain a deeper understanding of this deactivation process and to enable the design of a reactivation strategy, in situ X-ray absorption spectroscopy (XAS) was used. With this technique, changes in the palladium oxidation state and coordination environment could be studied in close detail, which provided experimental evidence that the deactivation was primarily caused by triethylamine-promoted reduction of palladium(II) to metallic palladium nanoparticles. Furthermore, it was observed that the choice of the acetylenic acid substrate influenced the distribution between palladium(II) and palladium(0) species in the heterogeneous catalyst after the reaction. From the mechanistic insight gained through XAS, an improved catalytic protocol was developed that did not suffer from deactivation and allowed for more efficient recycling of the catalyst.