Do Restructurings Improve Post Restructuring Productivity?

• In Event: Financial Accounting and Reporting III

Abstract

Claims that more efficient companies emerge after organizational restructurings are countered by critics who suggest that such initiatives disrupt organizational learning. Furthermore, the accounting for restructuring costs has been subjected to criticism on the grounds that managers recognize excess restructuring charges merely to boost future earnings. The purpose of this study is to examine how normal and excess restructuring charges affect future productivity. The study also aims to examine whether investors utilize the information in normal and excess restructuring charges.
This study is conducted in two stages based on a sample of restructurings that occurred during 1992-2007. The first stage involves 1) determining excess restructuring charges after estimating normal restructuring charges using a Tobit-model and 2) measuring productivity using Data Envelopment Analysis (DEA). The second stage involves examining the impact of normal and excess restructuring charges on future productivity and returns.
This study documents that normal restructuring charges lead to improvement in future productivity while excess restructuring charges are associated with lower future productivity. Further, it shows that investors seem to fail to utilize the information contained in excess restructuring charges.
This is the first study to document that normal restructuring charges lead to improvement in productivity while excess restructuring charges harm productivity. It also shows that investors fail to use information in excess restructuring charges. Thus, the study highlights the importance of isolating normal and excess restructuring charges in analyzing the impact of restructurings on performance.

Keywords Normal restructuring charges, Excess restructuring charges, DEA, Productivity.

Author

• Menghistu Sallehu, Eastern Illinois University