Managers of Financially Distressed Firms: Villains or Scapegoats?

Khanna, Naveen; Poulsen, Annette B.

doi:10.1111/j.1540-6261.1995.tb04042.x

Cited by 123 publications

(53 citation statements)

References 40 publications

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“…However, proponents of scapegoating theory report that little meaningful change occurs after succession (Sakano and Lewin, 1999). Scapegoating theory suggests that, in underachieving organizations, blame for poor performance is placed on a top manager for being responsible for strategy or its execution (Khanna and Poulsen, 1995). However, Khanna and Poulsen (1995) found that such managers are scapegoats for greater endemic problems, finding no evidence that past managerial decisions are the root causes of organizational failings.…”

Section: Short-term Performance After Manager Changementioning

confidence: 99%

“…Scapegoating theory suggests that, in underachieving organizations, blame for poor performance is placed on a top manager for being responsible for strategy or its execution (Khanna and Poulsen, 1995). However, Khanna and Poulsen (1995) found that such managers are scapegoats for greater endemic problems, finding no evidence that past managerial decisions are the root causes of organizational failings. Consequently, change gives rise to disruption which masks underlying problems, thereby causing further damage to performance in the short term (Brown, 1982), as is indicative of vicious circle theory.…”

Section: Short-term Performance After Manager Changementioning

confidence: 99%

“…According to this theory, managers are replaced as a ritual to signal that boards of directors have taken action to address poor performance. Yet, Khanna and Poulsen (1995) find that managers are rarely to blame for poor performance as they do not deliberately make value-destroying decisions. Scapegoating then occurs as a CEO or other executives protect their own positions by blaming and removing certain managers.…”

Section: Introductionmentioning

confidence: 99%

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Short‐term versus Long‐term Impact of Managers: Evidence from the Football Industry

Hughes

Mellahi

et al. 2010

British J of Management

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Studies into the impact of top manager change on organization performance have revealed inconsistent findings. Using longitudinal data over a 12-year period on football organizations, we test for the short-term and long-term effects of manager change in comparison to the tenures of incumbent top managers. We find that long incumbent tenures are associated with performance far above the average. But when looking at change events, contrary to theoretical expectations, we find that change in the short term leads to a brief reprieve in poor performance only for performance to deteriorate in the long term as underlying weaknesses once again take hold. Our findings reveal the illusion of a short-term reprieve and the long-term consequences of this illusion. We map several implications for research and practice from our work.

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Section: Short-term Performance After Manager Changementioning

confidence: 99%

Section: Short-term Performance After Manager Changementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Short‐term versus Long‐term Impact of Managers: Evidence from the Football Industry

Hughes

Mellahi

et al. 2010

British J of Management

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“…Second, corporate boards may replace managers of poorly performing firms even if the managers are not responsible for the poor performance. (See, for example, Khanna and Poulsen (1994).) Under neither of these scenarios would a change in management necessarily be expected to generate performance improvements.…”

Section: Internal Monitoring Mechanisms Have Recently Received Considmentioning

confidence: 99%

Performance Changes Following Top Management Dismissals

Denis¹,

Denis

1995

The Journal of Finance

426

444

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We document that forced resignations of top managers are preceded by large and significant declines in operating performance and followed by large improvements in performance. However, forced resignations are rare and are due more often to external factors (e.g., blockholder pressure, takeover attempts, etc.) than to normal board monitoring. Following the management change, these firms significantly downsize their operations and are subject to a high rate of corporate control activity. Normal retirements are followed by small increases in operating income and are also subject to a slightly higher than normal incidence of postturnover corporate control activity. * Krannert School of Management, Purdue University, West Lafayette, Indiana. We are grateful for helpful comments received from Linda DeAngelo, Rob Hansen, Greg Kadlec, Scott Lee, David Mayers, Dilip Shome, Ren6 Stulz (the editor), Michael Weisbach, Marc Zenner, two anonymous referees, and the workshop participants at North Carolina State University, Ohio State University, and Virginia Tech. This work has been partially supported by summer research grants from the Pamplin College of Business at Virginia Tech. 1 For an account of several recent board-initiated top management changes at large firms see Stewart (1993).2 This rate is computed as the total number of management changes divided by the total number of firm-years (1,689 firms times four years) in the sample. The rate will understate the true turnover rate to the extent that some firms are delisted (e.g., mergers, liquidations, etc.) between 1985 and 1988.3 Turnover rates conditional on other events related to corporate control or financial distress are much higher. Although not directly comparable due to differences in the definition of turnover and sampling periods, turnover rates are 42 percent following corporate takeovers (Martin and Mc-Connell (1991)), 44 percent following unsuccessful acquisition attempts (Agrawal and Walkling (1994)), 33 percent following negotiated block trades (Barclay and Holderness (1991)), 51 percent following proxy contests (DeAngelo and DeAngelo (1989)), 40 percent following defensive share repurchases and special dividends (Denis (1990)), 40 percent following greenmail payments (Klein and Rosenfeld (1988)), and 52 percent following the onset of financial distress (Gilson (1989)). held corporations, Journal of Financial Economics 23, 29-60. , 1990, Performance pay and top-management incentives, Journal of Political Economy 98, 225-264. Kaplan, Steven, 1989, The effects of management buyouts on operations and value, Journal of Financial Economics 24, 217-254. Kaplan, Steven, 1994, Top executive rewards and firm performance: A comparison of Japan and the U.S., Journal of Political Economy 102, 510-546.

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“…However, the stock market's reaction to top-management changes in distressed firms is mixed. Announcements of change in senior management in distressed firms are greeted positively (Bonnier and Bruner, 1989), negatively (Khanna and Poulsen, 1995) or neutrally (Warner, Watts and Wruck, 1988;Weisbach, 1988) by the market.…”

Section: Managerial Restructuringmentioning

confidence: 99%

Corporate Financial Distress and Turnaround Strategies: An Empirical Analysis

Sudarsanam

Lai²

2001

British J of Management

198

153

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Corporate turnaround has received much attention in the strategy literature and, increasingly, in finance. These two streams have, however, differed in their focus, i.e. type of strategies, in their approach, i.e. whether descriptive or prescriptive and in the definition of performance decline. A range of strategies has been prescribed for their potency in corporate recovery. Corporate responses to performance decline cover a wide range of restructuring: managerial, asset or strategic, financial, operational and organizational.Corporate downward spiral to failure, after the onset of performance decline, is attributed by past researchers (e.g. Barker and Mone, 1994;Hambrick and Schecter, 1983;Hofer, 1980;Hoffman, 1989;Schendel, Patton and Riggs, 1976;Weitzel and Jonsson, 1989) to managerial inaction, poor timing and lack of intensity and poor implementation of turnaround strategies. This suggests that success of managerial responses to performance decline is conditioned by their timing, intensity and effective implementation. Analysis of these factors requires a multi-period examination of the turnaround process. Again, empirical evidence on these factors contributing to effectiveness of turnaround strategies, based on large-scale analysis, is limited. Extant research on corporate turnaround from financial distress has prescribed a range of strategies to effect corporate recovery. However, no large sample study has examined the general applicability and effectiveness of these strategies. We set out to test the effectiveness of strategies and identify the underlying factors of effectivenessthe impact of timing, intensity and implementation of strategies on corporate recovery. We examine a sample of 166 potentially bankrupt UK firms drawn from 1985 to 1993 and track their turnaround strategies for a period of three years from distress. These strategies include operational, asset, managerial and financial restructuring. Our results show recovery and non-recovery firms adopt very similar sets of strategies, and managers of non-recovery firms restructure more intensively than recovery firms. Nevertheless, non-recovery firms seem far less effective in strategy implementation than their recovery counterparts. Whereas recovery firms adopt growth-oriented and external-market focused strategies, non-recovery firms engage in fire-fighting strategies.

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Managers of Financially Distressed Firms: Villains or Scapegoats?

Cited by 123 publications

References 40 publications

Short‐term versus Long‐term Impact of Managers: Evidence from the Football Industry

Short‐term versus Long‐term Impact of Managers: Evidence from the Football Industry

Performance Changes Following Top Management Dismissals

Corporate Financial Distress and Turnaround Strategies: An Empirical Analysis

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