Corporate Governance and Financial Constraints on Strategic Turnarounds

27 Pages Posted: 8 May 2006

See all articles by Igor Filatotchev

Igor Filatotchev

City University London - Sir John Cass Business School

Steve Toms

University of Leeds - Leeds University Business School (LUBS); University of Leeds - Division of Accounting and Finance

Abstract

The paper extends the Robbins and Pearce (1992) two-stage turnaround response model to include governance factors. In addition to retrenchment and recovery, the paper proposes the addition of a realignment stage, referring specifically to the realignment of expectations of principal and agent groups. The realignment stage imposes a threshold that must be crossed before the retrenchment and hence recovery stage can be entered. Crossing this threshold is problematic to the extent that the interests of governance-stakeholder groups diverge in a crisis situation. The severity of the crisis impacts on the bases of strategy contingent asset valuation leading to the fragmentation of stakeholder interests. In some cases the consequence may be that management are prevented from carrying out turnarounds by governance constraints. The paper uses a case study to illustrate these dynamics, and like the Robbins and Pearce study, it focuses on the textile industry. A longitudinal approach is used to show the impact of the removal of governance constraints. The empirical evidence suggests that such financial constraints become less serious to the extent that there is a functioning market for corporate control. Building on governance research and turnaround literature, the paper also outlines the general case necessary and sufficient conditions for successful turnarounds.

Suggested Citation

Filatotchev, Igor and Toms, Steve, Corporate Governance and Financial Constraints on Strategic Turnarounds. Journal of Management Studies, Vol. 43, No. 3, pp. 407-433, May 2006. Available at SSRN: https://ssrn.com/abstract=898970 or http://dx.doi.org/10.1111/j.1467-6486.2006.00596.x

Igor Filatotchev

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Steve Toms (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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