Does Retrenchment Boost Performance? Evidence from Fallen Angels

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