Market Reactions to Corporate Restructurings

Percy S Poon, Gerald D Newbould and Cindy Durtschi

Review of Quantitative Finance and Accounting, 2001, vol. 16, issue 3, 269-90

Abstract: This article examines the stock price reactions to restructuring announcements by the DJIA 30 corporations over the period 1988-95 by employing the event study methodology and cross-sectional regression analyses. Corporate restructurings, historically regarded as highly unusual accounting events, became increasingly common after 1987. One probable cause is the discretionary power managers enjoy due to the flexibility allowed by the Accounting Principles and Financial Accounting Standards Boards. Our general findings are that, contrary to contemporary press comments, restructurings, especially those impose a charge against the firm's earnings, are typically associated with negative excess returns. This evidence seems to be consistent with the notion that restructurings reveal unfavorable information of the firm's future performance. Furthermore, the larger the size of the restructuring amount announced in the Wall Street Journal, the more negative the stock price reaction is. Copyright 2001 by Kluwer Academic Publishers

Date: 2001
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