The Relation Between Disaggregated Re-structuring Charges And Stock Returns: The Effects Of Financial Distress

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><em><span style="font-family: Times New Roman;">We examine the relation between restructuring charge components and stock returns for firms reporting restructuring charges in the year disaggregated component disclosure became mandatory. We find significant coefficients on disaggregated components of restructuring charges in a regression of returns on earnings, earnings changes, and restructuring charge components. We provide evidence that for firms that exhibit signs of financial distress, aggregate restructuring charges, as well as the disaggregated components of restructuring charges, are priced differently than they are for financially healthy firms. Results suggest that for financially distressed firms, investors perceive supplemental disclosure as a positive signal of the firm&rsquo;s future operating performance, and view negatively a disclosure that lacks detail and/or clarity.<span style="mso-spacerun: yes;">&nbsp; </span></span></em></span></p>

Restructuring Charges and CEO Cash Compensation: A Reexamination

Prior research generally concludes that compensation committees completely shield executive compensation from the effect of restructuring charges on earnings. In contrast, we find that after controlling for the growth in annual inflation-adjusted CEO cash compensation, compensation committees only partially shield CEO compensation from the adverse effect of restructuring charges on earnings, on average. In further analyses, we identify factors associated with cross-sectional differences in the extent of shielding. Specifically, we find that compensation committees appear to: (1) completely shield initial and subsequent restructuring charges for CEOs with long tenure, provided that the firm had not recorded a charge in the two immediately prior years; (2) provide no shielding of subsequent restructuring charges taken by short-tenured CEOs if the firm reported a prior restructuring charge within two years of the current charge; (3) and partially shield the other categories of restructuring charges. Overall, this study provides evidence that compensation committees evaluate the context of each restructuring in determining the extent to which they will intervene to shield executive compensation from the effect of these charges.

Do Firms Use Restructuring Charge Reversals to Meet Earnings Targets?

Many firms that take restructuring charges reverse a portion of those restructuring charge accruals in a later quarter. These reversals increase net income, often substantially. In this study, I investigate whether restructuring charge reversals are associated with incentives to meet or exceed analysts' forecasts, avoid earnings declines relative to prior-year levels, and avoid losses. I examine both the decision to record a reversal and the amount of the reversal, using a sample of 121 reversals recorded between 1990 and 1999. The results suggest that some firms record reversals to beat analysts' forecasts and to avoid reporting net losses. There is also some evidence that firms record reversals to avoid earnings declines. Overall, the results are consistent with firms using restructuring accrual reversals to manage earnings.