The Effects of Financial and Operational Restructuring
The effects of financial and operational restructuring on firm performance
Sophie Spekreijse
Student number 10004647
Bsc. Economics and Business, University of Amsterdam, 1 July 2014
Supervisor Timotej Homar
Abstract
The objective of this study is to examine the effect of financial and operational restructuring on firm performance, considering a sample of Dutch firms which are restructured during 2008 – 2011. Using a difference-in-difference model, I find some evidence that restructuring improves the firm
performance. In addition, I conclude that financial restructuring improves the firm performance, whereas operational restructuring has no effect. Finally, I find no evidence that the combination of financial and operational restructuring has a different effect on firm performance than the sum of the effects of financial and operational restructuring implemented separately.
Index
1. Introduction ... 2
2. Review of related literature ... 3
3. Data ... 4
4. Empirical methodology ... 6
4.1 Hypothesis and tests ... 6
4.2 Model ... 7
5. Results ... 9
5.1 Development of ROA and cash flow ratio ... 9
5.2 Regression results ... 11 6. Discussion ... 19 6.1 Discussed results ... 19 6.2 Limitations ... 22 7. Conclusions ... 22 8. Appendices ... 24
Appendix 1 – List of restructured firms ... 24
1. Introduction
In the past decade corporate restructuring has become increasingly common (Lin, Lee, & Peterson, 2006). Corporate restructuring involves many forms, including financial, managerial and operational restructuring. Restructuring includes making difficult decisions concerning business strategies, operations, organizational functions and management structures, which lead to risky and expensive actions (Bergh, 1997; Lin et al., 2006). There is extensive literature on specific forms of restructuring, motives, influences and effects of corporate restructuring (Cascio, Young, & Morris, 1997; Muñoz-Bullón & Sánchez-Bueno, 2011; Perry & Shivdasani, 2005; Powell & Yawson, 2012). Bowman et al. (1999) concentrated on which restructuring works best. Their results showed that restructuring have positive, but modest effects on performance. Among the several forms analysed, financial
restructuring improves economic performance the most. Perhaps this is because financial
restructuring is more focused on economic results. Whether restructuring is applicable and effective is examined by Sudarsanam and Lai (2001). They tested the effectiveness and identified the
underlying factors of effectiveness of operational, asset, managerial and financial restructuring among potentially bankrupt firms in the United Kingdom. Recovery as well as non-recovery firms adopt very similar sets of strategies. Non-recovery firms restructure more intensively than recovery firms, but seem far less effective in their implementation.
This thesis builds on the research of Bowman et al. (1999) and Sudarsanam and Lai (2001). As found by Bowman et al. (1999), financial restructuring has the strongest effect on economic performance improvement, but their study has not focussed on the possible beneficial effects of combining restructuring forms. In this thesis financial and operational restructuring are combined to analyse if it is useful to implement those strategies at the same time. Financial restructuring can strengthen operational restructuring or the other way around, and improve firm performance. If this appears to be the case, companies can profit by not only restructuring their financials, but also their
organizational structure. For firms in distressed situations the probability of exiting the market might reduce when they implement several forms of restructuring.
The aim of this study is to examine the joint effects of the combination of financial and operational restructuring. I focus on firms which are restructured during 2008 – 2011 in the Netherlands. To examine the joint effect of financial and operational restructuring, I test whether restructuring has an effect on firm performance. Secondly, I analyse the two forms of restructuring separately and
compare the effects. Finally, I test whether the combination of financial and operational
restructuring has a different effect on firm performance compared to the sum of the operational and financial restructuring implemented separately.
The paper is organized as follows. The next section reviews the related literature. The third section describes the data and is followed by the empirical methodology. The fifth section presents the results, which are discussed in the subsequent section. The final section provides the conclusions and suggestions for future research.
2. Review of related literature
Companies restructure for various reasons as changing industry, more demanding shareholders, more competitive markets, more challenging workforces and financial difficulties (E.H. Bowman, Singh, Useem, & Bhadury, 1999; Markides & Singh, 1997; Powell & Yawson, 2012). The main purpose of restructuring is to improve the company’s performance (Lin et al., 2006). Restructurings can take many forms. Bowman and Singh (1993) defined three forms of restructuring. Financial restructuring includes changes in the capital structure of a firm. For example debt restructuring, leverage buyouts, leveraged recapitalization, debt equity swaps, equity issues, stock changes and dividend cut or omission (Gibbs, 1993; Lai & Sudarsanam, 1997).
The second and third restructurings defined by Bowman and Singh (1993) are portfolio and organizational restructuring. Portfolio restructuring entails significant changes in the asset mix of a firm or the lines of business which a firm operates, including liquidation, divestitures, asset sales and spin-offs (Edward H. Bowman & Singh, 1993). Organizational restructuring involves significant changes in the organizational structure of the firm, including redrawing of divisional boundaries, flattening of hierarchic levels, spreading of the span of control, reducing product diversification, revising compensation, reforming corporate governance and downsizing employment.
Portfolio and organizational restructurings have a large effect on a firm’s operations. Therefore, in this thesis both restructuring strategies are part of operational restructuring. As stated by Lin et al. (2006) operational restructuring involves making decisions about appropriate workforce size and skill requirements, plant capacity and location, functions consolidation and possible shifts in production focus. More specifically, operational restructuring can be considered as a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by an enterprise; or the manner in which the business is conducted.
Various studies focus on a specific option of these restructuring forms as downsizing and layoff (Cascio et al., 1997; Muñoz-Bullón & Sánchez-Bueno, 2011). Muñoz-Bullón and Sánchez-Bueno (2011) did their study among Spanish firms and did not find significant differences in firm
performance between firms that downsize and those that did not. Also the layoffs did not lead to improved performance levels. Other studies like Powell and Yawson (2012) focused on firm survival.
Whereas Muñoz-Bullón and Sánchez-Bueno (2011) did not find significant differences in performance level, Powell and Yawson (2012) concluded that divestitures improve the survival likelihood by reducing the probability and speed of market exit via takeover and bankruptcy. Layoffs have the opposite effect; the probability and speed increase the probability of market exit via bankruptcy. What restructuring strategy is applicable for firms is studied by Ashta, Diaz-Bretones and Tolle (2007). They concluded that selecting a restructuring strategy is influenced by the characteristics of the restructuring strategy and the firm, the environment and the firm’s distress level. Previous studies stated that the intensity of the restructuring has an effect on firm performance (Cascio et al., 1997; De Meuse, Bergmann, Vanderheiden, & Roraff, 2004).
There is extent research on firm characteristics that influence corporate recovery. Markides and Singh (1997) did research about the effect of corporate governance. They found evidence that corporate restructuring is prompted by organization misfits and related inappropriate internal controls. That the firm’s board has an impact is underwritten by Perry and Shivdasani (2005). Management’s experience with corporate restructuring models influences the restructuring
positively (Bergh & Lim, 2008). In addition, whether an independent director was involved during the restructuring, could influence the outcome as well. Powell and Yawson (2012) show that effective internal corporate governance through the operations of the board can affect the survival likelihood of the firm. Having a sufficient number of independent directors, who monitor and oversee the decision making, influences the board’s ability to make sound and effective corporate decisions (Fama & Jensen, 1983). Cotter and Peck (2001) suggest that active monitoring by a buyout specialist increase the firm’s performance more than tighter debt terms in monitoring and motivating
managers of levered buyouts. An independent director can play a central role in the composition of the restructuring and therefore influence the firm’s performance.
However, these factors may influence the firm performance in this sample as well, this study is focused on the firm’s financials. The findings in this study contribute to the perspective on corporate restructuring by offering insight in the effectiveness of the combination of financial and operational restructuring among Dutch firms, by illustrating the different effects of the combined restructuring compared to the effects of the restructuring forms implemented separately.
3. Data
This study uses a dataset of Dutch firms which were restructured during the years 2008 till 2011. The data is obtained from Grant Thornton, KPMG, Nimbus and Eurofound and by online research in mainly the source LexisNexis. These companies mainly informed me about restructured firms, the form of restructuring and its magnitude. I discussed the cases with Grant Thornton and KPMG to
obtain more insight in the restructurings. The financial information is obtained from AMADEUS and annual reports, which I mainly collected from the Chamber of Commerce. I collected data of restructured firms for 2 years prior to the restructuring, the year of restructuring and 2 years after the restructuring to analyse the firm performance over a period of five years. The sample consists of firms in various industries and of different sizes.
The final data set consists of a total of 26 firms; including 11 operational restructured firms, 7 financial restructured firms and 8 firms which implemented as well operational as financial restructurings. From the original sample, 9 firms have been discarded, mostly due to the lack of relevant data. In 6 cases annual reports were not available. For the other 3 firms, I defined the cases as a merger or acquisition instead of a restructuring. The list of restructured firms is attached in Appendix 1.
The control group consists of all Dutch firms active in the years 2005 -2013 available in AMADEUS. This is a total of 21742 firms. As along with the treatment data, no distinction is made for industries or firm size in the dataset.
The tables below show descriptive data of the treatment and the control group. I dropped some of the firms in the control group, since the data appeared to be incorrect or not comparable with my treatment group. I dropped the data with ROA higher than 100% and lower than -100%. I made a range for the leverage ratio of 0 to 200%. The efficiency and liquidity ratio are respectively limited to 15% and 20%. To obtain a comparable group, I dropped firms with less than 7 employees and total assets below €200.000. In addition, the extreme values in the data are limited to reduce the effect of outliers. I winsorized all variables except size, by the 1 and 99 percentile.
1. Descriptive data of control group
Variable Obs Mean Std. Dev. Min Max
ROA 8031 0.0872 0.163087 -1.037 0.78893
Cash flow ratio 1943 0.0792 0.151063 -0.747 0.77728
Liquidity ratio 64510 2.9032 3.685922 0.005 18.036 Leverage ratio 26488 0.3289 0.28219 0.0026 1.4176 Efficiency ratio 4918 3.5566 3.311614 0 13.403 Total assets in €’000 71125 6510 22846 200 146534 Sales in €’000 4056 352922 1136548 3 8160000 Employees 33513 87 205 8 988
2. Descriptive data of restructured firms
Variable Obs Mean Std. Dev. Min Max
ROA 170 0.0030 0.0753 -0.3457 0.4353
Cash flow ratio 106 0.0987 0.1627 -0.7469 0.7773
Liquidity ratio 171 1.1513 0.8870 0.0050 6.8560 Leverage ratio 151 0.2227 0.2448 0.0026 1.4176 Efficiency ratio 121 2.1122 2.4563 0.0000 11.4360 Total assets in €’000 168 58887 60057 271 146534 Sales in €’000 98 415732 891546 42 8160000 Employees 121 464 421 10 988
The total assets, sales and employees are indicators for the size of the firm. The sample of restructured firms are on average larger than the control group. This indicates that the control consists of more smaller firms. The minimum and maximum values are similar for the two groups, except for the sales. The minimum value of the sales is for the control group smaller compared to the minimum value of sales of the restructured firms.
The ROA is smaller for restructured firms compared to the control group. The mean of the cash flow ratio, calculated as the operating cash flow divided by sales, is smaller for the control group. The liquidity ratio (current assets divided by current liabilities) and the leverage ratio (long-term debt to assets) are smaller for restructured firms than for the control group. A low current ratio indicates that firms may have difficulty meeting its current obligations. The lower leverage ratio is in line with the study by Gibbs (1993). Gibbs stated that management has incentives to reduce the leverage to minimize the bankruptcy risks. The mean of the efficiency ratio is lower for the treatment group, which indicates that asset turnover for restructured firms is lower.
4. Empirical methodology
In this section I present the hypotheses and explain what tests I use. Secondly, I show the model and explain the dependent variables, followed by an explanation of the control variables.
4.1. Hypothesis and tests
Based on the research question set out in the introduction, I developed five hypotheses. The first hypothesis test whether restructuring influence the firm performance. The second and third
hypothesis test for respectively financial and operational restructuring separately. Whether financial restructuring has more influence on firm performance than operational restructuring, is tested by the fourth hypothesis. The final hypothesis test whether the combination of financial and operational
restructurings has a different effect on firm performance compared to the sum of financial and operational restructuring implemented separately.
The hypotheses are as follows:
Hypothesis 1: Restructuring has an effect on firm performance
Hypothesis 2: Financial restructuring has an effect on firm performance Hypothesis 3: Operational restructuring has an effect on firm performance
Hypothesis 4: Financial restructuring has a larger effect on firm performance than operational
restructuring
Hypothesis 5: Combining financial and operational restructuring has a different effect on firm
performance than the sum of the effects of financial and operational restructuring implemented separately.
To test for the effect of restructuring and its different forms, I use a model based on the difference-in-difference approach. I focus on measuring the firm performance after the restructuring, whereby I measure the difference between the performance of restructured firms and the control group. I set out the model in the next paragraph. Whether financial restructuring has more influence on firm performance than operational restructuring is tested by a Wald test.
The observations of the tests are tabled and discussed after the explanation of the model.
4.2. Model
To test the hypotheses as stated above, I use three models. The first model measures the effect of restructuring, whereas the second model focus on the distinction between financial and operational restructuring. The third model includes the combination of financial and operational restructuring to measure the joint effects. For the results of the models, see Table 1 till 4 in the next section. The models are as follows:
( 1 )
( 3 )
Y is the dependent variable firm performance. I use two variables to measure the firm performance. Consistent with prior literature, I use the return on assets (ROA). The ROA is computed by dividing operating income before depreciation, interest and taxes by assets (Cascio et al., 1997; De Meuse et al., 2004; Muñoz-Bullón & Sánchez-Bueno, 2011).
In addition to the ROA, I use the operating cash flow ratio, which is calculated as operating cash flow divided by total sales. This ratio is an indicator for firm’s ability to turn sales into cash (Gibbs, 1993; Muñoz-Bullón & Sánchez-Bueno, 2011).
The restructurings are specified as dummy variables. There are three dummy variables in the model; operational restructuring, financial restructuring and the combination; financial and operational restructuring. The dummy variable (Oper) takes the value 1 if a firm has implemented operational restructuring, and zero otherwise. The same method works for the dummy variable (Fin). If a firm has implemented financial as well as operational restructuring, the variable (FinOper) takes the values 1, and if not, the variable is zero. To measure the effect during the year of restructuring and after the implementation I added for each restructuring form two dummies: Year and After. Year takes the value 1 when it contains the year of restructuring and 0 otherwise. The dummy After takes the value 1 when the observation is measured in the period after the restructuring and 0 otherwise.
I added variables to check for other factors that have been documented to influence the firm performance. Prior research shows that firm characteristics can influence the relationship between restructuring and firm performance (Atiase, Platt, Tse, & Dechow, 2004; De Meuse et al., 2004; Gibbs, 1993; Muñoz-Bullón & Sánchez-Bueno, 2011).
Leverage. Prior studies have argued that leverage improves corporate performance due to the
disciplinary role of debt (González, 2013). On the other hand, firms with higher leverage prior to the onset of industry economic distress, experience a decline in operating profit, caused by larger indirect costs of financial distress than the control benefits of debt (González, 2013). This result is in line with Opler and Titman (1994) who provided evidence that highly leveraged firms lose substantial market share and experience lower operating profits than their competitors in industry downturns. Gibbs (1993) found that the debt intensity increases through financial restructuring. Hoskisson, Johnson and Moesel (1994) built further on this finding and show in their study that high debt intensity leads to high levels of portfolio divestment intensity. The
long-term debt-to-assets-ratio is used to control for the effect of leverage on firm performance (Berger & Ofek, 1994; Hoskisson, Johnson, & Moesel, 1994).
Size. The firm’s size is a proxy for the flexibility and internal slack available for the firm. Larger
firms might have better negotiation positions and developed strategies (Sudarsanam and Lai, 2001). To control for these possible effects, I added the variable size, which is calculated as the natural log of total assets (Ambrose & Megginson, 1992; Powell & Yawson, 2012).
Liquidity. This is measured by the current ratio, which is calculated as current assets divided by
current liabilities (Chang, 1996). This variable controls for the financial resources of the firm, which may operate as organizational slack and affect the firm’s reaction to its performance gap. Organizational slack is the excess capacity maintained by a firm and might work as a protector for the firm to an uncertain business environment (Näslund, 1964).The performance gap is defined by (Duncun & Weiss, 1979) as a discrepancy between an organization’s current performance and potential performance. As well as organizational slack as the performance gap might be a motivation for restructuring.
Asset efficiency. To measure how effectively a firm uses its resources to generate sales, I included
the asset turnover ratio. This ratio is calculated by net sales divided by total assets (Azhagaiah & Kumar, 2011; De Meuse et al., 2004; Khurana & Lippincott, 2000).
5. Results
In the next section, the results are explained. I start with discussing the graphs, which give an idea of the development of the ROA and the cash flow ratio for restructured firms and the control group. Secondly, I explain the results of the three models, as outlined in the previous section. The observations are shown in table 1 to 4.
5.1. Development of ROA and cash flow ratio
The graphs below show the development of ROA and the cash flow ratio. In the first two graphs, the ROA and cash flow ratio for the control group is shown. Both ratios remain positive over time. The ROA alters more than the cash flow ratio. The decline in 2008 and 2009 might be caused by the financial crisis (Campello, Graham, & Harvey, 2010)
Figure 1. Development of ROA of the control group
Figure 2. Development of the cash flow ratio of the control group
The graphs on the next page, show the development of the return on assets and the cash flow ratio for restructured firms over five years. Since not all the restructurings in the sample have taken place in the same year, I cannot compare the developments with the compare group. Instead I show the development over the 2 years prior to the restructuring and 2 years after the restructuring. For the year of restructuring, time is 0.
The graphs show, consistent with prior studies (Atiase et al., 2004), that the firm performance declines in the 2 years prior to the restructuring. The first graph shows the development of the ROA. A sharp decline is visible two years before the implementation of the restructuring. The ROA declines further in the year prior to the restructuring. When the firm is restructured, the steep slope shows a large improvement in the return on assets. In year 1 the ratio is about 0, which becomes positive in year 2. 0 2 4 6 8 10 12 2005 2006 2007 2008 2009 2010 2011 2012 2013 %
ROA
6,8 7,3 7,8 8,3 8,8 9,3 2005 2006 2007 2008 2009 2010 2011 2012 2013 %Figure 3. Development of ROA of restructured firms
The development of the cash flow ratio is visible in the second graph. The ratio decreases sharply in the year before restructuring. Whereas the cash flow ratio is negative in the year of restructuring, the ratio improves immediately after the restructuring. In the subsequent year the cash flow ratio inclines to a ratio of 16 percentage point.
Figure 4. Development of the cash flow ratio of restructured firms
6. Regression results
In this section I explain the results of the tests, which are tabled on the next page. Firstly, I focus on the outputs of the three models. I link the results to the hypotheses to form the basis of the
discussion, which is set out in the next section. Secondly, I analyse the control variables and the year -4 -3 -2 -1 0 1 2 3 4 -2 -1 0 1 2 % Time in years
ROA
-10 -5 0 5 10 15 20 25 -2 -1 0 1 2 % Time in yearsTable 1: Regression on absolute changes in ROA ROA absolute change (1) ROA absolute change (2) ROA absolute change (3) Leverage -0.0140 -0.0157 -0.0100 (0.0192) (0.0192) (0.0194) Size 0.0032 0.0032 0.0031 (0.0046) (0.0046) (0.0046) Liquidity 0.0046 0.0046 0.0046 (0.0042) (0.0042) (0.0042) Efficiency 0.0060*** 0.0059*** 0.0060*** (0.0016) (0.0296) (0.0016) Restructured Firm 0.0360*** (0.0126) Restructuring Year -0.0070 (0.0280) After Restr -0.0029 (0.0234) Fin Restructured 0.0365*** 0.0585** (0.0140) (0.0245)
Fin Restructuring Year -0.0148** -0.0366
(0.0296) (0.0354)
After Fin Restructuring 0.0389 0.0171
(0.0184) (0.0267)
Oper Restructured 0.0164 0.0247
(0.0140) (0.0161)
Oper Restructuring Year 0.0077 -0.0004
(0.0473) (0.0479)
After Oper Restructuring -0.0074 -0.0155
(0.0362) (0.0371)
Fin & Oper Restructured -0.0480
(0.0307)
Fin & Oper Restructuring Year 0.0154
(0.0162)
After Fin & Oper Restructuring 0.0161
(0.0166)
Year dummies Yes Yes Yes
Constant -0.0519* -0.0516* -0.0516*
(0.0299) (0.0299) (0.0300)
Adjusted R2 0.0124 0.0124 0.0124
Observations 2066 2066 2066
Wald test (p-value) 0.2830 0.4638
The table illustrates the output of the regressions based on robust standard errors. The values in parentheses show the standard deviations of the coefficients. The estimation includes dummies for the years 2006 – 2013. The figures in the Wald test display the p-values. *p<0.10; **p<0.05; ***p<0.01.
Table 2: Regression on relative changes in ROA
ROA ROA ROA
relative change (1) relative change (2) relative change (3)
Leverage 21.9321 22.1718 21.4168 (26.5212) (26.6716) (26.6226) Size 21.8298** 21.8356** 21.9258** (10.7124) (10.7271) (10.7396) Liquidity -3.4761 -3.4994 -3.5733 (2.5331) (2.5307) (2.5260) Efficiency 3.2897 3.3171 3.2422 (2.4204) (2.4252) (2.4218) Restructured Firm -57.8663 (55.3630) Restructuring Year 67.3986 (57.7440) After Restr 98.3652* (59.3130) Fin Restructured -132.8323 -178.4262 (119.2147) (159.9991)
Fin Restructuring Year 144.0109 189.7578
(119.0438) (159.8323)
After Fin Restructuring 208.8500* 254.0448
(125.5077) (164.6245)
Oper Restructured 11.0797 4.7994
(11.8666) (7.7708)
Oper Restructuring Year -2.3122 3.9077
(20.1317) (18.3225)
After Oper Restructuring 16.6157 22.7456
(20.6412) (18.7748)
Fin & Oper Restructured 168.1614
(159.1691)
Fin & Oper Restructuring Year 0.0000
(Omitted)
After Fin & Oper Restructuring 13.4466
(12.5903)
Year dummies Yes Yes Yes
Constant -117.4972* -117.0739* -116.3876*
(64.7475) (64.8067) (64.7581)
Adjusted R2 0.0110 0.0120 0.0126
Observations 2029 2029 2029
Wald test (p-value) 0.1401 0.1587
The table illustrates the output of the regressions based on robust standard errors. The values in parentheses show the standard deviations of the coefficients. The estimation includes dummies for the years 2006 – 2013. The figures in the Wald
Table 3: Regression on absolute changes in the cash flow ratio
Cash flow Cash flow Cash flow
absolute change (1) absolute change (2) absolute change (3)
Leverage 0.0845 0.1206* 0.1042 (0.0615) (0.0637) (0.0659) Size 0.0315*** 0.0289** 0.0296** (0.0117) (0.0114) (0.0116) Liquidity -0.0327** -0.0327** -0.0329** (0.0165) (0.0162) (0.0163) Efficiency -0.0079*** -0.0077*** -0.0082*** (0.0028) (0.0028) (0.0028) Restructured Firm -0.0716 (0.0461) Restructuring Year -0.1028 (0.1129) After Restr 0.0439 (0.0594) Fin Restructured -0.1202** -0.2013* (0.0608) (0.1081)
Fin Restructuring Year -0.4179* -0.3359
(0.2149) (0.2367)
After Fin Restructuring -0.0713 0.0111
(0.0822) (0.1229)
Oper Restructured -0.0383 -0.0102
(0.0815) (0.0511)
Oper Restructuring Year 0.0083 -0.0189
(0.0486) (0.0822)
After Oper Restructuring 0.0653 0.0829
(0.0693) (0.0710)
Fin & Oper Restructured 0.1351
(0.1557)
Fin & Oper Restructuring Year -0.0520
(0.0984)
After Fin & Oper Restructuring 0.0104
(0.1038)
Year dummies Yes Yes Yes
Constant -0.1097 -0.1018 -0.1000
(0.0753) (0.0726) (0.0729)
Adjusted R2 0.0952 0.1515 0.1550
Observations 456 456 456
Wald test (p-value) 0.2632 0.6136
The table illustrates the output of the regressions based on robust standard errors. The values in parentheses show the standard deviations of the coefficients. The estimation includes dummies for the years 2006 – 2013. The figures in the Wald test display the p-values. *p<0.10; **p<0.05; ***p<0.01.
Table 4: Regression on relative changes in the cash flow ratio Cash flow relative change (1) Cash flow relative change (2) Cash flow relative change (3) Leverage 26.1046 24.6638 24.0836 (25.1302) (21.4239) (22.7931) Size 4.8659 4.4829 4.5343 (4.4460) (3.8270) (3.7897) Liquidity -0.1324 -0.0809 -0.0699 (1.1742) (1.2173) (1.2128) Efficiency -0.2348 -0.1286 -0.1377 (0.6384) (0.6155) (0.6500) Restructured Firm -16.3391 (10.4009) Restructuring Year -21.3355 (34.0432) After Restr 34.6875 (23.6550) Fin Restructured 0.4103 -2.1742 (9.8874) (2.3007)
Fin Restructuring Year -10.7555 -8.0179
(11.4439) (9.1697)
After Fin Restructuring 71.9017 74.5716
(73.1705) (68.8341)
Oper Restructured -17.6284 -18.4172
(13.5231) (16.0040)
Oper Restructuring Year -38.4782 -37.5632
(52.2359) (53.3058)
After Oper Restructuring 15.4724 16.3172
(14.2096) (16.5000)
Fin & Oper Restructured -0.5950
(18.2582)
Fin & Oper Restructuring Year 14.7089
(10.2498)
After Fin & Oper Restructuring 7.7826
(6.1301)
Year dummies Yes Yes Yes
Constant -26.9682 -25.4775 -25.5265
(29.4598) (25.2879) (25.4836)
Adjusted R2 0.1000 0.1709 0.1715
Observations 456 456 456
Wald test (p-value) 0.4541 0.4094
The table illustrates the output of the regressions based on robust standard errors. The values in parentheses show the standard deviations of the coefficients. The estimation includes dummies for the years 2006 – 2013. The figures in the Wald
Hypothesis 1: Restructuring has an effect on firm performance
The first model test whether restructuring has an effect on firm performance. Restructured firms have in general higher absolute changes in ROA of 3.6 percentage point. During the year in which the firm is restructured, the change in ROA is lower compared to non-restructured firms, but this is not significant. The restructuring has an insignificant negative effect on the absolute changes in ROA in the period after the implementation. In contrast to the absolute changes, the relative changes in ROA improve in the period after the restructuring. This effect is significant at the 10 percentage point level. When a firm is restructured, the relative changes in ROA are reduced with 58 percentage point, but in the year of restructuring, the relative changes of ROA of restructured firms are higher with 67 percentage point compared to firms that did not restructure. However, the latter two indications are insignificant.
The same pattern shows up in the effect on the cash flow ratio. The restructured firms have lower absolute changes in the cash flow ratio of about 7 percentage point compared to the control group. These lower absolute changes in ROA remains during the year of restructuring. The effect of the restructuring is positive in the period after the implementation, but none of the results is significant. The same effects appear on the relative changes in the cash flow, but neither in this regression significant results appears.
Hypothesis 2: Financial restructuring has an effect on firm performance
For the second and third hypothesis, I use model 2. The effect of both restructurings implemented separately may be measured by the third model as well, but since the combined restructuring has no effect, the third model provides no more evidence for the effects of operational and financial
restructuring implemented separately. The effect of the combined restructuring is discussed in a subsequent paragraph concerning hypothesis 5.
Financial restructured firms experience higher absolute changes in ROA of 3.7 percentage point. In the year of restructuring, the financial restructured firms have lower absolute changes in the ROA compared to non-financial restructured firms. Both results are significant at respectively the 1% and the 5% level. The effect of financial restructurings in the period after the implementation seems to be positive, but this is not significant. The effect in the period after restructuring is significant when the relative changes are tested. The relative changes on the ROA improve with 208 percentage point. This effect appears after the year of restructuring, in which the restructured firms have higher relative changes in ROA than non-financial restructured firms, whereas the restructured firms experience in general lower relative changes in ROA. However, the latter two effects are not significant.
When focused on the cash flow ratio, the firm’s ability to turn sales into cash is lower when firms are financial restructured. The financial restructured firms have lower absolute changes in cash flow ratio than non-financial restructured firms. This appears to be the case in the year of restructuring as well. Both results are significant at respectively the 5% and the 1% level. Whether the financial
restructuring leads to an improved cash flow ratio after the restructuring is not detectable, since this results is insignificant. In case of the relative changes in the cash flow ratio, none of the effects is significant. However, the pattern is the same as in the absolute changes on ROA.
Hypothesis 3: Operational restructuring has an effect on firm performance
The second model is used again to test whether operational restructuring has an effect. The changes in the ROA are higher for operational restructured firms than for non-operational restructured firms in absolute and relative measurement. In the year of restructuring, the operational restructured firms still experience this higher absolute changes, whereas the relative changes are lower. The effect of operational restructuring after the year of restructuring is positive on the relative changes, but negative on the absolute changes . But since none of the results is significant, there is no evidence for these supposition.
The absolute and relative effects on cash flow ratio show a different pattern. In both cases operational restructured firms perform less efficient than firms which are not operational restructured. During the year of restructuring, the operational restructured firms have higher absolute changes on the cash flow ratio than non-operational restructured firms, but lower relative changes. The effect in the period past restructuring is in both measurements positive, but since the results are not significant, any inferences cannot be drawn.
Hypothesis 4: Financial restructuring has a larger effect on firm performance than operational restructuring
For the fourth hypothesis I use an additional test. The Wald test measures whether the difference between the effect of financial restructuring and operational restructuring is significant. Although, I did not use the third model for the prior two hypotheses, I perform the Wald test on this model as well to conclude whether the option of the combined restructuring changes the difference in effect of the two restructurings separately.
In none of the models the Wald test is significant. Therefore the results of this study do not provide evidence to conclude that there is a difference in the effect on ROA or cash flow ratio between financial restructuring and operational restructuring.
Hypothesis 5: Combining financial and operational restructuring has a different effect on firm performance than the sum of the effects of financial and operational restructuring implemented separately
The last hypothesis is tested by the third model. When focused on the absolute changes in ROA, firms that are financial and operational restructured have lower absolute changes in ROA than firms which have not implemented both restructurings. During the year of the combined restructuring, the restructured firms experience larger changes in the absolute changes in ROA compared to firms that are not financial and operational restructured. The coefficient for the period after restructuring is positive, which implies that that the combined restructuring improves the absolute changes in ROA. However, none of these results is significant.
Neither the results in the other tables are significant. Although, the effects of relative changes in ROA are positive and the effect of year of restructuring is omitted. This variable provides no new
information in the model.
Whereas financial and operational restructured firms have higher absolutes changes in the cash flow ratio and lower in the relative changes. During the year of the combined restructuring, the opposite appears; the absolute changes are lower and the relative changes are higher compared to firms which were not financial and operational restructured. In both measurements the period after the restructuring has a positive effect. But none of the results is significant.
Control variables
The control variables have various effects on ROA and the cash flow ratio. A 1 percentage point increase in the leverage leads to a decrease in the absolute change on ROA of about 1 percentage point. A higher size, liquidity and efficiency ratio has a positive effect on the absolute changes in ROA. The magnitude of the effects changes little in comparison of the three models. Efficiency is in all models the only significant variable, at the 1% point level.
The relative changes in ROA are positively affected by leverage, size and efficiency. Liquidity has a negative effect, but this effect is insignificant. Size is significant at the 5% level.
Leverage and size have a positive effect of respectively 13 percentage point and 1.5 percentage point on the absolute change in the cash flow ratio. Liquidity and efficiency reduces the cash flow ratio. Size and efficiency are highly significant at the 1% level. Liquidity is significant at the 5% level, whereas leverage is only significant in the second model.
The effect of the variables on the relative changes in the cash flow ratio moves in the same direction as on the absolute changes. However, none of the results is significant and therefore no statistically significant dependence of the cash flow ratio on the control variables is detected.
Year effect
To control for the effect of the years in which the restructuring has been implemented, dummy variables for the years 2006 – 2013 are added to the model. Only in the models of the relative changes in ROA is a year effect visible. The year 2012 is significant at the 5% level. These results show that this year performs significantly better than the other years.
7. Discussion
In this study, five null hypotheses are developed and tested. In this section, I discuss the results as explained in the previous section and I form the basis for the conclusions, which are drawn in the next section.
7.1. Discussed results
Hypothesis 1: Restructuring has an effect on firm performance
For the first hypothesis I test whether restructuring has an effect on firm performance. Previous research found evidence that restructuring has a positive effect on firm performance (Atiase et al., 2004; Edward H. Bowman & Singh, 1993; Brickley & Van Drunen, 1990). In this study the results show higher absolutes changes in ROA for firms that are restructured, but no significant effect after
restructuring appears in the absolute changes in ROA. The relative changes in ROA in the period after restructuring are positive and significant at the 10% level. This indicates that the ROA increases relatively more for restructured firms than for non-restructured firms.
The effect of restructuring on the absolute changes in cash flow ratio is negative. This implies that restructured firms have a lower ability to turn sales into cash. In the period after the restructuring, the effect on the absolute and relative changes in the cash flow ratio are positive. This is in line with Atiase et al. (2004), who shows a significantly higher cash flow ratio for restructuring firms than non-restructuring firms, but mention that this difference also appear in the period prior to the
restructuring. This latter effect does not appear in the results, which might be explained by the insignificant results in this study.
Only in the regression on the relative changes in ROA, the coefficient of the effect of the period after restructuring is significant. Since the other coefficients are insignificant, there is some suggestive evidence to accept hypothesis 1.
Hypothesis 2: Financial restructuring has an effect on firm performance
The second hypothesis states that financial restructuring has an effect on firm performance. The results show that financial restructuring increases the absolute changes in return on assets, but has
absolute change in ROA are lower for financial restructured firms than for firms that have not implemented a financial restructuring. Since the year of restructuring has no significant effect, no relation between the relative changes in ROA and the year of implementation is detected. In both measurements the period after restructuring has a positive and significant effect on the relative changes at the 10% level. These results indicate that financial restructuring improves the firm’s ability to convert the invested money into earnings before interest and income.
The effect of financial restructuring on the cash flow ratio is the opposite; financial restructuring reduces the firm’s ability to turn sales into cash. The coefficient is negative, what implies that financial restructured firms have lower absolute changes in cash flow ratios compared to non-financial restructured firms. This effect is not visible in the relative changes, but since these results are not significant, the results provide no evidence for conclusions.
The year of restructuring has a significant negative effect on the absolute changes. This indicates that during the restructuring year, financial restructured firms have lower absolute changes in the ROA. Whether this effect remains after that year, is not derivable from the results, since these results are insignificant.
The period after the implementation of the financial restructuring shows a positive effect on ROA. These results are evidence for accepting the hypothesis. The effect of the past financial restructuring period on the cash flow ratio is insignificant. That the effect of restructuring differs for ROA and cash flow ratio, is emphasized in Atiase et al. (2004). They found evidence for improvements in earnings and operating income for restructuring, but the effect on the cash flow ratio is mixed.
Hypothesis 3: Operational restructuring has an effect on firm performance
The third hypothesis states that operational restructuring has an effect on firm performance. The findings of operational restructuring are not significant. This leads to a rejection of the hypothesis and to the conclusion that operational restructuring has no effect on firm performance.
Hypothesis 4: Financial restructuring has a larger effect on firm performance than operational restructuring
Whether financial restructuring has a larger effect on firm performance than operational restructuring is examined by the Wald test. Bowman et al. (1999) provided evidence that firm performance is more influenced by financial restructuring than by other restructuring strategies. In this study none of the differences between the effect of financial form and the operational form of restructuring is significant. This may be due to the similar effects of the restructurings. When the relative changes are measured, both financial as operational restructuring have a positive coefficient for the time after the implementation year. The effect on absolute changes moves in different
directions. The insignificance of the results of operational restructuring may explain the insignificant differences.
Based on the results, the hypothesis is rejected. This study provides no evidence for concluding that financial restructuring has a larger effect on firm performance than operational restructuring.
Hypothesis 5: Combining financial and operational restructuring has a different effect on firm performance than the sum of the effects of financial and operational restructuring implemented separately
In the last model I test the fifth hypothesis, which states that the combination of financial and operational restructuring has a different effect on firm performance than the sum of the effects of financial and operational restructuring implemented separately. The effect of the combined restructuring in the period after restructuring is positive in each measurement, whereas the
restructuring forms implemented separately have positive and negative effects, depending on which independent variables is used. However, the results of the combined restructuring are insignificant, what leads to the rejection of the hypothesis.
The insignificant results might be explained by the situation of restructured firms. Since this is a combined restructuring, a major part of the firm experiences the changes caused by the
restructuring. Secondly, when a firm has to restructure its financial and operational structure, there is reason to assume that firms are in worse situations before the restructuring compared to firms, which implemented only one form of restructuring. In this model the magnitude of the restructuring is not taken into account what might cause the insignificant results.
Control variables
The absolute changes in ROA are significantly influenced by efficiency. The asset turnover increases the absolute and relative changes in the return on assets. Higher leverage decreases the absolute change in ROA, but the variable has no significant effect. The firm’s size influences the relative change in ROA. Large firms may be able to perform better restructurings due to more effectively negotiations and strategies (Sudarsanam & Lai, 2001).
The effects of size, liquidity and efficiency are highly significant on the absolute changes in the cash flow ratio. The leverage ratio has a positive effect on the absolute changes in the cash flow ratio. This indicates that a 1 percentage point increase in the long-term-to-debt-ratio, leads to an improved cash flow ratio of about 8 percentage point to 12 percentage point. Gibbs (1993) stated that management has incentives to reduce the leverage to minimize the bankruptcy risks. Therefore a positive effect is surprisingly and remarkable.
7.2. Limitations
This study should take several limitations into account. First of all 26 restructured firms form the data. The limited data may not fully capture the effects of restructuring. An extension of the data may strengthen the conclusions reported in this study. In addition, sample bias may affect the results (Phalippou, 2009). I obtained the data partly through companies. I have not determined whether these companies presented successful, as well as unsuccessful restructurings, to me. The
restructured firms collected from Eurofound and NexisLexis are more objective, since Eurofound is an information resource established to promote an understanding of company restructurings and relevant policies. The restructuring cases founded by NexisLexis are more random and therefore less involved with selection bias. Future research needs to refine the data to overcome a sample bias. Secondly this study measures only the development of firm performance over five years. Thereby I assumed that a restructuring is implemented within one year. Hoskisson, Johnson and Moesel (1994) use the time spent restructuring was the number of years between the announcement of
restructuring and the announcement that restructuring was completed. If the firm made no announcement that the restructuring was over, a two year gap was used as time required to
restructure. If the assumption made in this study does not hold, the effect might show up on a longer term. Chaney, Hogan and Jeter (1999) provide evidence that analysts expect a decline in firm
performance on the short term but possible improvements over the long term. To examine the effect, a longer period might lead to different inferences.
In addition, I have not taken into account the intensity of the restructuring. In previous research mixed conclusions are drawn whether the magnitude of restructuring has effect on the firm performance (Cascio et al., 1997; De Meuse et al., 2004). In particular when firms implemented financial as well as operational restructuring, the magnitude might have an influence. Next, the firm’s situation might differ when the intensity is high compared to firms with low intensity restructurings. When the analysis control for these difference, the results might be different.
8. Conclusions
In this study I analysed the effects of operational and financial restructuring on firm performance among Dutch firms. The firm performance is measured in terms of ROA and the cash flow ratio. I examine the effects of financial and operational restructuring implemented separately and combined.
This study provides some suggestive evidence that restructuring has an effect on firm performance. Of the three restructuring strategies implemented separately, I found some evidence that financial
restructuring influences the firm performance. The implementation of financial restructuring affects the ROA positively. In this study no results affirm that financial restructuring influence the cash flow ratio. In case of operational restructuring, this study has not find significant effects. Therefore I draw the conclusion that operational restructuring has no effect on firm performance.
Even though operational restructuring has no effect, I examined with the Wald test whether financial restructuring has a larger effect on firm performance than operational restructuring. No significant differences between the effects of these restructurings are found. Therefore in this study is concluded that financial restructuring has no larger effect than operational restructuring. This conclusion is not supportive for the findings of Bowman et al. (1999), who states that financial restructuring has the most impact on firm performance.
Finally, when the restructuring forms are combined to a financial and operational restructuring, no significant results appears. The insignificant results do not provide evidence for the hypothesis that the combined restructuring has a different effect on firm performance than the sum of the effect of operational and financial restructuring implemented separately. Therefore it is not proved that the combination of financial and operational restructuring leads to improved firm performance. I suggest for future research to refine the methodology to overcome the limitations of the study. Especially a larger data set is preferable, since many results in this study are insignificant.
In addition, it might be interesting to focus on the firm’s characteristics and the implementation of the restructuring. As set out in the review of related literature, the firm’s board, the magnitude of the restructuring and the involvement of an independent director may influence the firm
performance (Bergh & Lim, 2008; Cascio et al., 1997; De Meuse et al., 2004; Fama & Jensen, 1983; Perry & Shivdasani, 2005). Future research may include these factors to strengthen the conclusions reported here.
9. Appendices
Appendix 1 – List of restructured firms
# Company Restructuring Year of restructuring Sales in €’000 Employees Industry Sales per employee in €’000 1 REFRESCO GERBER B.V. Financial 2010 1.223.945 2.527 Manufacturing 484 2 Q PARK N.V. Financial 2011 693.600 2.523 Transportation and storage 275 3 ORDINA N.V. Financial 2011 426.337 3.147 Information and communication 135 4 STICHTING LAURENTIUS
ZIEKENHUIS ROERMOND Financial 2008 75.428 1.025 Healthcare 74 5 ROODMICROTEC N.V. Financial 2009 12.076 132 Manufacturing 91 6
HENK GRAFIMEDIA
CENTER B.V. Financial 2009 2.400 25 Manufacturing 96 7
VNU BUSINESS MEDIA
EUROPE B.V. Financial 2009 49.563 432 Publisher 115 1
MERCK SHARP &
DOHME B.V. Operational 2011 1.030.819 722 Manufacturing 1428 2
TELEGRAAF MEDIA
GROEP N.V. Operational 2011 577.200 2.822 Publisher 205 3 Project Mills Operational 2011 235.000 364 Food 645 4 GOLDEWIJK B.V. Operational 2011 82.933 316 Construction 262
5 KONINKLIJKE THEODORUS NIEMEYER B.V. Operational 2011 120.525 520 Manufacturing 232 6 A-FILM BENELUX HOLDING B.V. Operational 2008 2.210 35 Film distribution 63 7 B.V. TEXTIELFABRIEKEN
H. VAN PUIJENBROEK Operational 2009 25.503 148 Manufacturing 172 8
VIALLE ALTERNATIVE
FUEL SYSTEMS B.V. Operational 2009 12.714 85 Manufacturing 150 9 MELDON PLASTICS B.V. Operational 2009 7.890 84 Manufacturing 94 10 Project Paleis Operational 2011 595.230 8.033 Healthcare 74 11 Project Strand Operational 2011 5.003 44 Healthcare 114 1 HOLLANDIA B.V. Financial and Operational 2011 95.856 348 Manufacturing 275 2 Project Doornroosje Financial and Operational 2010 1800 10 Retail 18 3 Project Care Financial and Operational 2009 73.519 910 Healthcare 81 4 Project Boek Financial and Operational 2011 5.003 30 Retail 167 5 Project Poseidon Financial and Operational 2010 2.331 22 Manufacturing 106 6 Project Aqua Financial and Operational 2010 4.416 40 Manufacturing 110 7 Project Betekenis Financial and Operational 2009 57.950 2.000 Healthcare 29 8 Project Fashion Financial and Operational 2011 4.313 36 Retail 120 26
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