Institutions and Preferences in Settings of Causal Complexity: Corporate Restructuring in France

Abstract

In this article, we conceptualize institutional arrangements and the presence of different categories of firm stakeholders as the two main explanatory factors for corporate restructuring. Institutions shape the range of actors' strategic options and mediate the translation of the preferences of firm stakeholders into corporate policies. Nonetheless, strategic choice remains possible: national economies are characterized by variations in the degree of institutional constraints across different spheres; and firm stakeholders constitute sub-groups with different interests and incentives that influence how they operate in an institutional framework. In particular, we examine how and under what conditions UK/US-based institutional investors and equity-based compensation incentives are associated with the implementation of asset divestitures and employee layoffs in France. We uncover three key findings. First, hedge funds and equity-based pay both influence the likelihood of French companies to undertake asset divestitures. Second, the impact of hedge funds on employee layoffs is contingent on the ownership structure of firms. Third, layoffs in France are defensive, i.e. driven by inferior performance. Our findings demonstrate the importance of the institutional constraints of (national-level) employment protection and the moderating effects of ownership structure (firm-level) on the critical strategic choices of firms.