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Institutional Monitoring and Corporate Restructurings

40 Pages Posted: 15 Sep 2006  

Rowland Atiase

University of Texas at Austin - Department of Accounting

William J. Mayew

Duke University - Fuqua School of Business

Yanfeng Xue

George Washington University - Department of Accountancy

Date Written: September 13, 2006

Abstract

We investigate the monitoring role performed by institutional investors in corporate restructurings. We hypothesize that institutional monitoring will (1) influence a firm's decision to restructure and (2) encourage restructurings that stop poor performance before it becomes too severe (i.e. pre-emptive restructurings) and that fix performance problems more completely (i.e. thorough restructurings). Consistent with these hypotheses, we document that the level of institutional ownership (changes in transient institutional holdings) is (are) increasing (decreasing) in the probability that a firm restructures. This result holds after controlling for other determinants of the restructuring choice, including existing internal corporate governance mechanisms. The association between institutional ownership and restructuring decisions is also robust after controlling for the possible endogeniety problem using a simultaneous equations approach.

Among firms that restructure, we find the level of institutional ownership increases the probability that the firm's restructuring is pre-emptive (proxied by positive or negative prior growth in ROE). We also find that institutional holdings increase the probability that a firm undergoes a restructuring that is thorough (proxied by above or below the median value of scaled restructuring charges). As a whole, the results suggest that institutional investors play an important monitoring role in encouraging managers to make value maximizing restructuring decisions.

Keywords: Institutional investors, Corporate restructuring

JEL Classification: G34, G23, M41

Suggested Citation

Atiase, Rowland and Mayew, William J. and Xue, Yanfeng, Institutional Monitoring and Corporate Restructurings (September 13, 2006). AAA 2007 Financial Accounting & Reporting Section (FARS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=930156 or http://dx.doi.org/10.2139/ssrn.930156

Rowland Atiase (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

William J. Mayew

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7781 (Phone)
919-660-7971 (Fax)

HOME PAGE: http://www.fuqua.duke.edu/faculty/alpha/mayew.htm

Yanfeng Xue

George Washington University - Department of Accountancy ( email )

School of Business and Public Management
Washington, DC 20052
United States

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