Skip to main content
SpringerLink
Log in

Operational restructurings: where’s the beef?

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

This study provides new evidence on the performance consequences of operational restructurings. Although managers claim that restructurings increase the efficiency and profitability of companies, prior studies reached mixed conclusions regarding the post-restructuring operational effectiveness of these events. Our evidence is consistent with the following conclusions. First, restructuring firms appear to perform better in reporting earnings relative to analysts’ forecasts after restructuring. Second, the ability of firms to meet or beat analysts’ forecasts after restructuring appears to be related to real performance improvements after restructuring. Consistent with that conclusion, we find substantial restructuring-related increases in both pre-managed earnings and operating cash flows. Overall, our results are consistent with suggestions of management that restructurings are undertaken to improve operating efficiency over the long term.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. We define a restructuring charge as costs associated with downsizing (i.e., employee termination costs, plant closings, lease termination costs and other similar exit-related activities).

  2. In addition, Matsunaga and Park (2001) report that CEOs are rewarded with additional compensation for beating analysts’ earnings forecast.

  3. We are not proposing that all firms should or would consider restructuring, or that firms should restructure simply to improve their likelihood of meeting or beating analysts’ forecasts. The very nature of a restructuring implies that restructuring firms have typically experienced poor firm performance and poor stock performance (Francis et al. 1996). Furthermore, a decision to restructure would be the product of an extensive decision process considering multiple factors.

  4. Moehrle identifies 121 firms with a “restructuring reversal” in the 10 year period 1990–1999. Similarly, we identify 197 observations that report a restructuring charge reversal on the face of the income statement in any of the 3 years subsequent to the restructuring year. The form of reversal examined by Moehrle is exactly how a firm is required to treat a reversal. That is, the reversal, if material, is required to be placed on the income statement in a manner consistent with the original restructuring charge except the amount is a reduction of operating expenses (income-increasing). For example, see the Apple Computer 1994 income statement where Apple recognizes a restructuring charge of $320 million in 1993 and reported a reversal of $127 million in 1994.

  5. Moehrle (2002) finds that the likelihood of meeting or beating analysts’ expectations increases in the year of restructuring charge reversals. We find an increase in the propensity of restructuring firms to meet or beat analysts’ forecasts subsequent to the restructuring even after we eliminate all firms that recognize an income increasing “restructuring reversal” on their income statement.

  6. Anecdotal and empirical evidence suggests that managers are not mere passive observers in the process of meeting or beating analysts’ forecasts. Rather, managers are active players in this process by altering reported earnings numbers (McGee 1997; Vickers 1999; Richardson 2000; Matsumoto 2002; Bartov et al. 2002; Stewart 2002; Koh et al. 2008). Former SEC Commissioner Norman S. Johnson expressed concern over this issue citing “the pressure imposed on management to meet analysts’ earnings estimates” as the single most important cause of earnings management (Utah State Bar Mid-Year Convention, March 6, 1999).

  7. SFAS 146 Accounting for Costs Associated with Exit or Disposal Activities. SFAS 146 superseded EITF 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).

  8. The SEC concluded that in 1992 Borden classified $192 million of marketing expenses as part of a restructuring charge when it should have been included in selling, general, and administrative expenses.

  9. The cumulative effect is subject to measurement error but follows directly from the Burgstahler et al. (2002) analysis.

  10. Johnson et al. (2011) report that over 35 % of all firms report a negative special item for every year after 2000.

  11. Examples of the SEC’s increased interest in restructurings date back several years (for example, see “The Numbers Game” speech by former SEC Chairman Arthur Levitt, New York University Law School September 28, 1998). In 1999, the Office of the Chief Accountant published SAB 100 that addressed issues related to accounting for restructuring charges.

  12. Moehrle (2002) provides evidence that firms record reversals of restructuring charge accruals to avoid earnings declines and beat analysts’ forecasts. Both Chaney et al. (1999) and Clement et al. (2007) provide evidence consistent with the notion that restructurings increase uncertainty for analysts when forecasting future earnings.

  13. After Motorola Inc. reported its fifteenth consecutive quarter with a non-recurring charge, Vivian Mamelak, a senior analyst at Arnhold & S. Bleichroeder Inc. stated, “If a company has taken 14 consecutive quarters of special charges, these charges aren't special, they're a normalized cost of Motorola doing business.” (Wall Street Journal, “Motorola Profit: ‘Special’ Again?", October 15, 2002).

  14. To perform this analysis, we eliminated 338 quarterly observations with a positive value for restructurings (i.e., a restructuring charge reversal).

  15. Prior research suggests that firms with negative forecast revisions most often report a negative earnings surprise in that same quarter. Although it is true that a negative revision makes it more likely that firms with bad news for the quarter will be able to report a positive earnings surprise, the fact is these same firms most often end up reporting a negative earnings surprise (e.g., Caylor et al. 2007). Thus, our finding of a negative coefficient on Down_Rev is not unexpected.

  16. Our results in this section appear to conflict with the findings of Chaney et al. (1999). In their study, Chaney et al. (1999) rely on a sample of restructuring firms for the years 1987 to 1992. They report that the mean and median earnings surprises (i.e., unexpected earnings) for the year following the restructuring are negative. However, there are two things about our tests that lead to different results and conclusions. First, prior research suggests a difference in the reporting of earnings relative to forecasts around 1994 (see Lopez and Rees 2002). Prior to 1994 earnings surprises tended to be, on average, optimistic, a finding consistent with the findings in Chaney et al. (1999). However, after 1994 earnings surprises tend to be pessimistic (more positive surprises). In fact, in more recent years over 70 % of firms report earnings surprises that are non-negative. Second, our tests look at the impact of restructurings on the frequency of meeting and beating forecasts. Chaney et al. (1999) provide no evidence on this question. Although they report that earnings surprises after the restructuring are negative, that does not exclude the possibility that more firms meet or beat their forecasts after restructuring. Finally, the enactment of SFAS 146 may, at least in part, account for the difference in results. All of the observations examined by Chaney et al. (1999) are pre-SFAS 146 while all of our observations are post-SFAS 146.

  17. Lin and Yang (2006) report evidence which suggests that analysts respond differently to firms that report repeat restructurings. We address this in two ways. First, we include a repeat restructuring measure in our propensity score procedure. Second, we rerun our Tables 2, 4 and 5 tests on a subset of firms that report no restructurings over the year prior to the event quarter. The results of these additional tests (not tabulated) are quantitatively and qualitatively similar to our tabulated results.

  18. We replicated the work of Cready et al. (2012) and find the restructuring charges lead to future earnings increases of approximately 500 % over the subsequent 3 years. In their Table 6 they report restructuring-induced increase to earnings of approximately 573 % over the subsequent 4 years.

  19. Since the dependent variables in equations (2) are change measures, to determine the income and cash flow effect of the SRC in years beyond y = 1, the SRC coefficients must be evaluated with respect to the coefficients for the prior year. For example, in year 1 the coefficient on SRC in the Σ4A∆PTI_DA y estimation of Eq. (2) is 1.235 suggesting that income increases in year +1 relative to the year prior to quarter t by 23.5 % of the restructuring charge (a coefficient of −1 implies the restructuring charge is transitory). That 23.5 % increase is in pre-tax income (PTI i ) in year +1. In year +2 the coefficient on SRC is 0.884 suggesting that restructuring charge-induced income increased in year +2 relative to year +1 by 88.4 % of the restructuring charge. Since earnings in year +1 are higher by 23.5 % of the restructuring charge, the total effect is that earnings increased in year +2 by 111.9 (23.5 + 88.4) % of the quarter t restructuring charge relative to pre-restructuring charge earnings. The 111.9 % is the amount we discuss in the text as the annual increase in year +2 earnings. This same procedure holds for calculating the cash flow change attributable to the restructuring charge since this is also a seasonally adjusted measure. The only difference with respect to cash flows is there is no necessary reversal of restructuring charges in cash flows for the first subsequent year as there is in earnings. Thus, any negative coefficient on SRC in year +1 implies an increase in cash flow (as discussed above for earnings the positive coefficient on SRC in year +1 must be greater than one to imply an increase in earnings) (Burgstahler et al. 2002).

  20. Relying on the other two measures of ∆PTI our results suggest that the future restructuring-induced increases to earnings are in excess of 350 % of the restructuring charge.

References

  • Ali A, Kallapur S (2001) Securities price consequences of the private securities litigation reform act of 1995 and related events. Account Rev 76(3):431–460

    Article  Google Scholar 

  • Ashbaugh H, LaFond R, Mayhew BW (2003) Do nonaudit services compromise auditor independence? Further evidence. Account Rev 78(3):611–639

    Article  Google Scholar 

  • Atiase RK, Platt DE, Tse SY (2004) Operational restructuring charges and post-restructuring performance. Contemp Account Res 21(3):493–522

    Article  Google Scholar 

  • Bannister JW, Newman HA (1996) Accrual usage to manage earnings toward financial analysts’ forecasts. Rev Quant Financ Acc 7(3):259–278

    Article  Google Scholar 

  • Barton J, Simko PJ (2002) The balance sheet as an earnings management constraint. Account Rev 77(s-1):1–27

    Article  Google Scholar 

  • Bartov E, Givoly D, Hayn C (2002) The rewards to meeting or beating earnings expectations. J Account Econ 33(2):173–204

    Article  Google Scholar 

  • Black EL, Carnes TA, Richardson VJ (2000) The value relevance of multiple occurrences of nonrecurring items. Rev Quant Financ Acc 15(4):391–411

    Article  Google Scholar 

  • Blackwell DW, Marr MW, Spivey MF (1990) Plant-closing decisions and the market value of the firm. J Financ Econ 26(2):277–288

    Article  Google Scholar 

  • Bowen RM, DuCharme L, Shores D (1995) Stakeholders’ implicit claims and accounting method choice. J Account Econ 20(3):255–295

    Article  Google Scholar 

  • Bowman EH, Singh H (1993) Corporate restructuring: reconfiguring the firm. Strateg Manag J 14(S1):5–14

    Article  Google Scholar 

  • Bricker R, Previts G, Robinson T, Young S (1995) Financial analyst assessment of company earnings quality. J Account Audit Financ 10(3):541–554

    Google Scholar 

  • Brickley JA, Van Drunen LD (1990) Internal corporate restructuring: an empirical analysis. J Account Econ 12(1):251–280

    Article  Google Scholar 

  • Brown LD (2001) A temporal analysis of earnings surprises: profits versus losses. J Account Res 39(2):221–241

    Article  Google Scholar 

  • Brown LD, Caylor ML (2005) A temporal analysis of quarterly earnings thresholds: propensities and valuation consequences. Account Rev 80(2):423–440

    Article  Google Scholar 

  • Buffet W (1999) Berkshire Hathaway 1998 letter to shareholders. Omaha, NE March 1:1999

  • Burgstahler D, Dichev I (1997) Earnings management to avoid earnings decreases and losses. J Account Econ 24(1):99–126

    Article  Google Scholar 

  • Burgstahler D, Eames M (2003) Earnings management to avoid losses and earnings decreases: are analysts fooled? Contemp Account Res 20(2):253–294

    Article  Google Scholar 

  • Burgstahler D, Eames M (2006) Management of earnings and analysts’ forecasts to achieve zero and small positive earnings surprises. J Bus Financ Account 33(5–6):633–652

    Article  Google Scholar 

  • Burgstahler D, Jiambalvo J, Shevlin T (2002) Do stock prices fully reflect the implications of special items for future earnings? J Account Res 40(3):585–612

    Article  Google Scholar 

  • Carter M (2000) Does operating performance improve after corporate restructurings? Working paper. MIT

  • Caylor ML, Lopez TJ, Rees L (2007) Is the value relevance of earnings conditional on the timing of earnings information? J Account Public Policy 26(1):62–95

    Article  Google Scholar 

  • Chaney PK, Hogan CE, Jeter DC (1999) The effect of reporting restructuring charges on analysts’ forecast revisions and errors. J Account Econ 27(3):261–284

    Article  Google Scholar 

  • Cheng Q, Warfield TD (2005) Equity incentives and earnings management. Account Rev 80(2):441–476

    Article  Google Scholar 

  • Clement MB, Koonce L, Lopez TJ (2007) The roles of task-specific forecasting experience and innate ability in understanding analyst forecasting performance. J Account Econ 44(3):378–398

    Article  Google Scholar 

  • Cohen D, Darrough MN, Huang R, Zach T (2011) Warranty reserve: contingent liability, information signal, or earnings management tool? Account Rev 86(2):569–604

    Article  Google Scholar 

  • Cready WM, Lopez TJ, Sisneros CA (2012) Negative special items and future earnings: expense transfer or real improvements? Account Rev 87(4):1165–1195

    Article  Google Scholar 

  • Dechow PM (2004) Discussion of “Operational restructuring charges and post-restructuring performance”. Contemp Account Res 21(3):523–527

    Article  Google Scholar 

  • Elliott JA, Hanna JD (1996) Repeated accounting write-offs and the information content of earnings. J Account Res 34(Supplement):135–155

  • Elliott JA, Shaw WH (1988) Write-offs as accounting procedures to manage perceptions. J Account Res 26(Supplement):91–119

  • Espahbodi R, John TA, Vasudevan G (2000) The effects of downsizing on operating performance. Rev Quant Financ Acc 15(2):107–126

    Article  Google Scholar 

  • Francis J, Philbrick D, Schipper K (1994) Shareholder litigation and corporate disclosures. J Account Res 32(Autumn):137–164

  • Francis J, Hanna JD, Vincent L (1996) Causes and effects of discretionary asset write-offs. J Account Res 34(Supplement):117–134

  • Holder-Webb L, Lopez TJ, Regier PR (2005) The performance consequences of operational restructurings. Rev Quant Financ Acc 25(4):319–339

    Article  Google Scholar 

  • Jaggi B, Lin B, Govindaraj S, Lee P (2009) The value relevance of corporate restructuring charges. Rev Quant Financ Acc 32(2):101–128

    Article  Google Scholar 

  • Johnson, N (1999) Remarks by commissioner Norman S. Johnson, Securities and Exchange Commission, Managed earnings and the year of the accountant. Utah State Bar Mid-Year Convention, St George, UT, http://www.sec.gov/news/speech/speecharchive/1999/spch264.htm

  • Johnson PM, Lopez TJ, Sanchez JM (2011) Special items: a descriptive analysis. Account Horizons 25(3):511–536

    Article  Google Scholar 

  • Kasznik R, McNichols MF (2002) Does meeting earnings expectations matter? Evidence from analyst forecast revisions and share prices. J Account Res 40(3):727–759

    Article  Google Scholar 

  • Kerstein J, Rai A (2007) Intra-year shifts in the earnings distribution and their implications for earnings management. J Account Econ 44(3):399–419

    Article  Google Scholar 

  • Koh K, Matsumoto DA, Rajgopal S (2008) Meeting or beating analyst expectations in the post-scandals world: changes in stock market rewards and managerial actions. Contemp Account Res 25(4):1067–1098

    Article  Google Scholar 

  • Kothari SP, Leone AJ, Wasley CE (2005) Performance matched discretionary accrual measures. J Account Econ 39(1):163–197

    Article  Google Scholar 

  • Lalli F, Lim P (1997) The real Dow. Money 26:76–79

    Google Scholar 

  • Lee YG (2013) An examination of restructuring charges surrounding the implementation of SFAS 146. Rev Account Stud. doi:10.1007/s11142-013-9260-9

  • Levitt A (1998) Remarks by chairman Arthur Levitt, Securities and Exchange Commission, The numbers game. NYU Center for Law and Business, New York, NY, http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt

  • Lin J-C, Rozeff MS (1993) Capital market behavior and operational announcements of layoffs, operation closings, and pay cuts. Rev Quant Financ Acc 3(1):29–45

    Article  Google Scholar 

  • Lin B, Yang R (2006) The effect of repeat restructuring charges on analysts’ forecast revisions and accuracy. Rev Quant Financ Acc 27(3):267–283

    Article  Google Scholar 

  • Lopez TJ, Rees L (2002) The effect of beating and missing analysts’ forecasts on the information content of unexpected earnings. J Account Audit Financ 17(2):155–184

    Google Scholar 

  • Matsumoto DA (2002) Management’s incentives to avoid negative earnings surprises. Account Rev 77(3):483–514

    Article  Google Scholar 

  • Matsunaga SR, Park CW (2001) The effect of missing a quarterly earnings benchmark on the CEO’s annual bonus. Account Rev 76(3):313–332

    Article  Google Scholar 

  • McAnally ML, Srivastava A, Weaver CD (2008) Executive stock options, missed earnings targets, and earnings management. Account Rev 83(1):185–216

    Article  Google Scholar 

  • McGee S (1997) As stock market surges ahead,“predictable” profits are driving it. Wall St J C1

  • Moehrle SR (2002) Do firms use restructuring charge reversals to meet earnings targets? Account Rev 77(2):397–413

    Article  Google Scholar 

  • Poon PS, Newbould GD, Durtschi C (2001) Market reactions to corporate restructurings. Rev Quant Financ Acc 16(3):269–290

    Article  Google Scholar 

  • Richardson VJ (2000) Information asymmetry and earnings management: some evidence. Rev Quant Financ Acc 15(4):325–347

    Article  Google Scholar 

  • Rosenbaum PR, Rubin DB (1983) The central role of the propensity score in observational studies for causal effects. Biometrika 70(1):41–55

    Article  Google Scholar 

  • SEC (2003) Civil Action No. 01-8437-CIV, Accounting and Auditing Enforcement Release No. 1707, January 27, 2003

  • Skinner DJ, Sloan RG (2002) Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio. Rev Acc Stud 7(2–3):289–312

    Article  Google Scholar 

  • Smith R, Lipin S (1996) Odd numbers: are companies using restructuring costs to fudge the figures? A Repeated strategic move makes future earnings seem unrealistically rosy: the role of Elsie the cow. Wall St J 1:30

    Google Scholar 

  • Stewart J (2002) Nonrecurring charges keep recurring in company financial reports. Chicago Tribune 1

  • Strong JS, Meyer JR (1987) Asset writedown: managerial incentives and security returns. J Financ 42(3):643–661

    Article  Google Scholar 

  • Vickers M (1999) Ho-hum, another earnings surprise. Bus Week 3630:83–84

    Google Scholar 

Download references

Acknowledgments

We are grateful to Thomson Financial for providing earnings forecast data, available through the Institutional Brokers Estimate System. These data have been provided as a part of their broad academic program to encourage earnings expectation research.

Author information

Authors and Affiliations

  1. Steed School of Accounting, Price College of Business, University of Oklahoma, Norman, OK, USA

    Mary S. Hill

  2. Culverhouse School of Accountancy, Culverhouse College of Commerce and Business Administration, University of Alabama, Tuscaloosa, AL, 35487, USA

    Peter M. Johnson & Thomas J. Lopez

  3. School of Accounting, Northeastern University, Boston, MA, USA

    Kelvin X. T. Liu

Authors
  1. Mary S. Hill
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Peter M. Johnson
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Kelvin X. T. Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Thomas J. Lopez
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Peter M. Johnson.

Appendix

Appendix

We use propensity score matching to match restructuring firms with non-restructuring firms. We use the following probit regression to calculate the propensity of each firm to undertake a restructuring:

$${\text{RCD}} = \alpha_{0} + \alpha_{ 1} {\text{ANNRET}} + \alpha_{ 2} {\text{DBTM}} + \alpha_{ 3} {\text{DROA}} + \alpha_{ 4} {\text{CEOCHG}} + \alpha_{ 5} {\text{HISTORY}} + \alpha_{ 6} {\text{IND}}\_{\text{HISTORY}} + \alpha_{ 7} {\text{SALES}} + \varepsilon$$
(3)

whereRCD = 1 if firm has a current period restructuring charge and 0 if firm does not have a restructuring charge in the current quarter or any of the previous four quarters; IND_HISTORY = mean value of HISTORY for all firms in firm i’s industry.

All other variables are previously defined. We apply this probit regression to each calendar quarter, and we match each restructuring firm to a non-restructuring firm in the same calendar quarter with the closest propensity score (i.e., predicted value). Table 9 reports the mean coefficients from each of the calendar quarter probit regressions.

Table 9 Propensity score matching probit regression
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Hill, M.S., Johnson, P.M., Liu, K.X.T. et al. Operational restructurings: where’s the beef?. Rev Quant Finan Acc 45, 721–755 (2015). https://doi.org/10.1007/s11156-014-0453-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-014-0453-5

Keywords

JEL Classification

Search

Navigation