Turnarounds Jeffrey L . Furman * and Anita

For many years, business turnarounds have captured the attention of scholars and fascinated executives. Yet despite their centrality as a business phenomenon, little is known about the prevalence or trajectory of turnarounds. This paper provides evidence on a broad cross-section of publicly traded companies to fill the gap. The results indicate that since 1987 the financialmarket premium on businesses with very low performance has been higher than the premium on companies with moderately low performance. Since 1993 the premium escalated dramatically, consistent with the idea that investors became increasingly enthusiastic about the prospect of turnarounds. The evidence suggests that this enthusiasm may be unfounded: During the 1980s and 1990s, businesses that experienced an episode of profitability in the lowest quintile of the economy rarely both retained their organizational stability and rebounded to achieve performance in the top quintile. In particular, very low performers that reported financial results as stable entities for 5 years were 3.4 times as likely to sustain their very low performance as to become very high performers. Similarly, only 3% of businesses that posted very high performance after having survived a 5-year period had been very low performers at the beginning of the period. The paper also identifies several of the exceptional businesses that remained independent, survived, and accomplished turnarounds during the 1980s and 1990s, and shows that the financial markets were not effective at identifying their impending turnarounds ex ante. Copyright # 2002 John Wiley & Sons, Ltd.