The Voluntary Restructuring of Large Firms in Response to Performance Decline

KOSE JOHN, LARRY H. P. LANG, and JEFFRY NETTERr
ABSTRACT
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.