Internal Restructuring and Firm Survival

Abstract

We examine the impact of two common methods of internal restructuring, layoffs and divestitures on the survival of a sample of UK firms. Using a Poisson regression model, we find that divestitures improve survival likelihood by reducing the probability and speed of market exit via takeover or bankruptcy, whereas layoffs increase the probability and speed of market exit via bankruptcy. Surprisingly, classifying firms into financially distressed and healthy groups, we find that distressed firms are less likely to restructure. Furthermore, while divestitures improve survival likelihood in both groups, layoff firms are less likely to survive, irrespective of whether they are distressed or healthy. Our findings are consistent with event studies that examine the market reaction to layoffs and divestiture decisions, and so provide some support for the view that the market correctly values the consequences of these restructuring actions on firm survival. The results are robust to several econometric and modeling issues, including controlling for potential self-selection bias.

Which governance characteristics affect the incidence of divestitures in Australia?

“…Similarly, Haynes et al (2003) document that firm size is associated with a higher frequency and intensity of divestiture activity. Hillier et al (2009) and Powell and Yawson (2012) also note that the likelihood of divesting increases with firm size in the UK.…”

“…Likewise, Haynes et al (2003) document a negative relation between operating performance and divestiture decisions in the UK. Powell and Yawson (2012) detect that low free cash flows and poor stock returns increase the probability of a divestiture. On a similar note, Lang et al (1995) show that firms with low Tobin's Q are more likely to undertake a divestiture while Ahn and Walker (2007) report that spinoff decisions are negatively related to the firm's excess-value which represents another measure of performance.…”

"Out with the Old, In with the New?: The Impact of Divestitures on Firm Performance"

“…Hoskisson and Johnson (1992) find that firms that engage in divestiture activity have significant improvement in their accounting performance relative to competitors. A subset of studies found a similar effect to divestiture announcements on market performance (Alexander, Benson, & Kampmeyer, 1984;Hite & Owers, 1983;Jain, 1985;Mulherin & Boone, 2000), and even on increasing the odds of survival by making firms less vulnerable to takeovers and bankruptcies (Powell & Yawson, 2012).…”

Who Acquires Toxic Targets?

“…We collect M&A data from the Thomson Financial SDC M&A Database over the period from January 1, 2000 to December 31, 2012. It may take considerable time for a major corporate event to trigger a takeover activity (Safieddine & Titman ; Powell & Yawson ). Therefore, we track our sample firms for five years beyond the litigation data period ending in 2007.…”