Managerial Discipline and Corporate Restructuring Following Performance Declines

Abstract

We examine the incidence of managerial control-reducing disciplinary events (e.g. takeovers, board dismissals, and shareholder activism) and corporate restructuring among firms experiencing a large decline in operating performance during an active takeover period (1985-1988) and a less active period (1989-1992). We document a significant decline in the disciplinary events from the active to the less active period that is driven by a significant decline in disciplinary takeovers (i.e. those takeovers that result in a top executive change). Following the performance decline, however, there is a substantial amount of corporate restructuring (e.g. asset sales, cost-cutting efforts, layoffs) and a significant improvement in operating performance during both the active and the less active takeover period. We conclude that, although some managerial disciplinary events are related to overall takeover activity, the decline in takeover activity has not precluded performance-enhancing resturcturings following performance declines.