An Analysis of the Operating Performance and Financial Statement Disclosures Associated with Corporate Restructurings

My thesis examines the operating performance and financial statement disclosures of firms that restructure their business strategy, structure or operations and, as a result, record restructuring charges in their financial statements. Chapter One examines three questions related to corporate restructuring and firm performance. First, do firms that take restructuring charges experience improvements in operating performance relative to performance absent a restructuring? Second, how many years after the restructuring does it take for any improvements to appear? Third, does the stock market reaction to the restructuring announcement reflect any subsequent performance changes? The results suggest that the operating performance of restructuring firms is lower than the expectation of performance absent a restructuring in the first three years after a restructuring and generally is no different from that expectation of performance in the fourth and fifth years after restructuring. Subsequent performance changes in the sample firms are not correlated with the stock price reaction to the restructuring announcement, but are correlated with stock returns in the year following the announcement. The effects of the accounting for restructurings and of survivor bias are discussed. Chapter Two examines two questions related to the financial statement disclosure of restructurings using the performance measures developed in Chapter One. First, are disclosures made about the actions taken in restructuring and the motivation for the restructuring associated with subsequent restructuring-related performance changes? Second, do firms that provide more detailed disclosure about the actions taken in the restructuring have higher stock returns? I find that, in general, disclosures made about the restructurings are not correlated with subsequent performance. However, there is some evidence that the motivation for the restructuring can explain some cross-sectional variation in subsequent performance. In addition, firms that provide more detailed disclosures do have higher market-adjusted stock returns but do not have higher subsequent operating performance. The effects of self-selection are discussed. Thesis Supervisor: Paul M. Healy Title: MBA Class of 1949 Professor of Business Administration