Corporate restructuring and turnaround : an exploratory study of the determinants and effectiveness of corporate restructuring strategies by troubled UK firms
In spite of decades of research into corporate turnaround strategies, corporate failures persist. Knowledge of remedies appears to be a necessary but insufficient condition for turnaround. There exists yet a serious gap in extant knowledge on what motivates managers to choose or avoid well-documented restructuring strategies. Further, extant research has focused predominantly on severely distressed firms. Though contributing immensely to corporate management out of a crisis, it throws little light in the direction of management to avoid a crisis, and thus avoidance of economic value destruction. Also, no large sample analysis has properly tested the general effectiveness of prescribed turnaround strategies. This research attempts to fill these empirical gaps by exploring three key research questions: I. What are the determinants of restructuring strategy choice in response to performance decline 2. How effective are the prescribed turnaround strategies in contributing to corporate turnaround from performance decline? 3. Are the turnaround strategies equally applicable and effective to both poorly performing and financially distressed firms? We integrate the disparate studies to date and devise a coherent framework for performance decline research and corporate restructuring. We also design a comprehensive strategy determinants framework for explaining the firm strategy selection process corporating the impact of lenders, owners, corporate governance structure and control factors. We employ the standard event study methodology to examine effectiveness of strategies. We then separate implementation success from other sources of strategy effectiveness- choice, timing and intensity of restructuring strategies. We also explore differences in the determinants and effectiveness of strategies between two samples comprising nearly 300 poorly performing and 200 financially distressed firms, as a function of the extent of firms' performance decline. Our results show that turnaround strategy choices are significantly influenced by the complex interplay of the ownership structure, corporate governance and lender monitoring of the firms in decline. While there is agreement among stakeholders on certain strategies there is also evidence of conflict of interests. The results also show the somewhat detrimental effects of dominance by certain stakeholder groups. However, no support for managerial inaction as a contributor to non-recovery from performance decline iss found. Instead of being paralysed by inertia, managers of on recovery firms appear to take vigorous and intensive restructuring actions. Our results suggest the root cause of non-recovery is bad implementation of restructuring strategies. Although pursuing similar strategies, non-recovery firms' managers are perceivedb y the markett o be far lesse ffective in their implementationst han those of recovery fin-ns. Comparative analysis of poorly performing and financially distressed firms reveals a striking similarity in determinants of strategy choice but some differencesi n the impact of restructurings trategieso n corporatet urnaround.