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Managerial discipline and corporate restructuring following performance declines

Purdue University
Publication Date
  • Business Administration
  • Management|Economics
  • Commerce-Business
  • Economics


This study examines the extent of managerial discipline and corporate restructuring in firms suffering substantial declines in industry-adjusted operating performance over the period 1985 to 1992. The sample period encompasses an active takeover period (1985-1988) and a less active takeover period (1989-1992), thus allowing for the tests of two hypotheses. First, the study examines whether managerial discipline and corporate restructuring are linked to activity in the market for corporate control. Second, it examines whether the long-term performance of the sample firms suffered during the less active takeover period.^ The results indicate a substantial decline in takeover threats in the 1989-1992 sub-period that is only partially offset by an increased incidence of targeting by shareholder activists such as public pension funds. Correspondingly, there is a net reduction in disciplinary managerial turnover from the first to the second sub-period. Although the incidence of asset restructuring among firms remaining independent is related to external control threats and to internal governance changes such as CEO turnover and changes in board composition, I find no significant difference in the incidence of restructuring between the active and the less active takeover periods. Furthermore, I do not find evidence that either the long-term accounting performance or the long-term stock returns are inferior for the firms suffering performance declines during the less active takeover period. Overall, the evidence suggest that there has been a substantial decline in managerial discipline in the late 1980's. However, there is no evidence that shareholders are worse off as a result of this decline. ^

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