Does Retrenchment Boost Performance? Evidence from Fallen Angels

Fisher College of Business Working Paper No. 2021-03-09

Charles A. Dice Center Working Paper No. 2021-09

57 Pages Posted: 14 Jun 2021

See all articles by Abed El Karim Farroukh

Abed El Karim Farroukh

University of Washington

Jennifer L. Koski

University of Washington - Michael G. Foster School of Business

Ingrid M. Werner

The Ohio State University - Fisher College of Business; CEPR

Date Written: June 11, 2021

Abstract

We study restructuring by firms whose stock prices experience a sharp decline to a low price level– fallen angels. In response to a price decline, firms can retrench by reducing investments and cutting the workforce, or increase leverage and investments hoping for lottery-like payoffs. We find that relative to a matched sample, fallen angels retrench. While retrenchment helps boost stock prices, reducing fixed assets and employment also increase firm risk, lower growth opportunities, and reduce the probability a firm remains listed. We find no consistent evidence that retrenchment actions undertaken by fallen angels affect future operating performance.

Keywords: restructuring, low stock price, fallen angels, retrenchment, gambling for resurrection

JEL Classification: G10, G30, G34

Suggested Citation

Farroukh, Abed El Karim and Koski, Jennifer Lynch and Werner, Ingrid M., Does Retrenchment Boost Performance? Evidence from Fallen Angels (June 11, 2021). Fisher College of Business Working Paper No. 2021-03-09, Charles A. Dice Center Working Paper No. 2021-09, Available at SSRN: https://ssrn.com/abstract=3866579 or http://dx.doi.org/10.2139/ssrn.3866579

Abed El Karim Farroukh

University of Washington ( email )

Box 353200
Seattle, WA 98195-3200
United States
2066319983 (Phone)

Jennifer Lynch Koski

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-7975 (Phone)
206-685-9392 (Fax)

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

CEPR ( email )

London
United Kingdom

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