Managerial Discipline and Firm Responses to a Decline in Operating Performance

Abstract

This study documents the operational and financial responses of UK companies that experienced a large decline in operating performance between 1992 and 1998. We present evidence showing that firms downsized by selling divisions, withdrawing from lines of business, reducing employment levels, and, in some cases, expanding, in response to the performance shock. Higher leverage, and in particular short-term leverage, increased the likelihood of downsizing. Whilst there is no evidence that board structure plays an important role in firm responses, external control threats appear to increase the likelihood of downsizing, forced CEO turnover, and rates of director removals and appointments. Issues of new equity play a role in board restructuring but also provide more funds for managers to expand their operations. Finally, sample matching techniques provide limited evidence of increases in operating performance following various corporate restructuring actions.

Keywords: Corporate Governance, Corporate Restructuring, Operating Performance

JEL Classification: G32, G34