Operational Restructuring Charges and PostRestructuring Performance*
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Firms incur restructuring charges as a result of actions intended to improve their operating performance. However, there is little evidence on whether restructuring charges are associated with improved performance. We examine a sample of firms reporting restructuring in 1991-93 and find that the restructuring firms' earnings increase over the levels immediately before restructuring. Compared with a control sample of firms that report no restructuring, the restructuring firms improve their earnings and operating income, but evidence for improvements in cash flow from operations is mixed. In regression analysis, we find that restructuring charges are significantly positively associated with post-restructuring changes in earnings relative to the restructuring year, but this association is largely driven by firms with multiple restructurings and firms reporting losses in the restructuring year. We find no association between restructuring charges and post-restructuring changes in earnings relative to the year before restructuring. Restructuring charges are significantly positively associated with post-restructuring changes in operating income and cash flow from operations for firms with multiple restructurings. In summary, restructuring charges are associated with improved earnings, but our results suggest that restructuring in the early 1990s did not necessarily guarantee improved operating performance.
