Evidence on the Incremental Information Contained in the Components of Restructuring Charges
33 Pages Posted: 15 Nov 1999
Date Written: November 1999
In response to the dramatic increase in corporate restructurings and perceived abusive accounting practices, the Emerging Issues Task Force (EITF) released Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring (EITF 94-3), in 1994. Among the new disclosures required by EITF 94-3 is the requirement that firms disclose the nature and amounts of the material components of a restructuring charge. Implicit in this requirement is the EITF's assumption that such disclosure provides incremental information to financial statement users. The usefulness of these disclosures, however, is subject to an ongoing debate. Recent Securities and Exchange Commission (SEC) staff comments suggest that the inadequacy of restructuring disclosures render the disclosures uninformative. The purpose of this paper is to assess whether one requirement of EITF 94-3 is informative to financial statement users. Specifically, this study empirically investigates whether the reporting of material components of a restructuring charge provides incremental information to financial statement users beyond that contained in the aggregate charge. This study measures incremental information content in the form of differences among the components of the restructuring charge as they relate to analysts' earnings forecast revisions. The hypothesis (stated in alternative form) is that the components of the restructuring charge convey differential information to analysts on firms' future prospects. This study evaluates this hypothesis with full (reduced) form regressions of analysts' forecast revisions on the reported components of (aggregate amount of) restructuring charges.
The primary empirical findings of this paper suggest that the components of restructuring charges are informative. The results suggest that the EITF was justified in mandating that the material components of the charge be disclosed. Further analysis indicates that the quality of the restructuring disclosure and/or the motive of management for taking the charge has an effect on the informativeness of the restructuring charge components. Thus, the results also provide support for the SECs stance that further regulatory guidance is necessary with respect to restructuring disclosures.
JEL Classification: G34, G12, G14, M41, M45
Suggested Citation: Suggested Citation