Do Restructurings Improve Operating Performance?

Abstract

Controversy over the desirability of corporate restructuring typically centers on the operational effectiveness of these events. The purpose of this study is to directly address this debate by providing evidence on the effect of restructurings on operating performance. This study incorporates a full set of research design enhancements to address the methodological limitations of prior studies. Using these design enhancements, our results do not reject a null hypothesis that restructuring firms have improved operating performance due to the restructuring in post-restructuring periods. In fact, the results are generally consistent with the conclusion that restructurings have a negative effect on firm operating performance in the years subsequent to the restructuring.

This conclusion is based on the following empirical evidence. First, the mean and median industry-adjusted operating margin of restructuring firms is significantly negative for all five pre-restructure years, and remains significantly negative for all five post-restructure years. Second, the mean industry-adjusted return on equity is negative for four of the five post- restructure years reported, and the median is significantly negative in years 2 and 3. Third, the mean and median operating margin forecast errors for restrucuturing firms are significantly negative in years 3 through 5, and the mean and median return on equity forecast errors are also negative, though not significant, in years 3 through 5. Most importantly, empirical tests using a metric designed to control for firm and industry performance in the absence of a restructuring indicates that operating margin for restructuring firms is significantly negative in years 3through 5.

JEL Classification: G34, M41