The Voluntary Restructuring of Large Firms In Response to Performance Decline





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    • John and Lang are, respectively, Charles William Gerstenberg Professor of Finance and Assistant Professor of Finance at the Stern School of Business, New York University, and Netter is Assistant Professor of Finance, University of Georgia. We thank Gordon Donaldson, Michael Jensen, Annette Poulsen, Linda Bamber, an anonymous referee, participants in the session on “Corporate Performance and Restructuring” at the January, 1992 American Finance Association meetings, seminar participants at the University of Western Ontario, and colleagues at New York University, the University of Michigan, and the University of Georgia for valuable comments. We also benefitted from discussions with Ken Lehn and Harold Mulherin. We thank Rob Nash and Ed Douthett for research assistance and John Legier for providing us with data. Kose John acknowledges support by research grants from the Institute for Quantitative Research in Finance and a NYU Yamaichi Faculty Fellowship. Netter acknowledges support from a Terry College of Business Research grant. Much of the research was done while Netter was visiting at the University of Michigan School of Business.


Much of the research on corporate restructuring has examined the causes and aftermath of extreme changes in corporate governance such as takeovers and bankruptcy. In contrast, we study restructurings initiated in response to product market pressures by “normal” corporate governance mechanisms. Such “voluntary” restructurings, motivated by the discipline of the product market and internal corporate controls, will play a relatively more important role in the 1990s due to a weakening in the discipline of the takeover market. Our data suggest that the firms retrenched quickly and, on average, increased their focus. There is no evidence of abnormally high levels of forced turnover in top managers. There is, however, a significant and rapid cut of 5% in the labor force. Further, the cost of goods sold to sales and labor costs to sales ratios both decline rapidly, more than 5% in the first two years after the negative earnings. The firms cut research and development, increased investment, and also reduced their debt/asset level by over 8% in the first year after the negative earnings. We also document the reasons management and analysis reported for the negative earnings. Overwhelmingly the firms blame bad economic conditions and, to a lesser extent, foreign competition.