Restructuring charges and takeover likelihood: Evidence from the pre-and post-SFAS 146 eras

Abstract

We investigate whether restructuring charges are related to the market for corporate control. Since the poor performance triggering restructuring charges and the potential for value generation in correcting the situation may invite takeovers, we argue that there would be a positive relation between the occurrence and magnitude of restructuring charges and takeover likelihood (indicated by takeover bids). We find evidence consistent with this argument. We also examine the effect of SFAS 146, which changed the nature of restructuring charges to include actual restructuring expenses and not planned future expenses, and find that the relationship between charges and takeover likelihood (interpreted as the information content of the charges) is stronger in the post-SFAS 146 period, lending support to the perspective that by eliminating the speculative element from the charge, SFAS 146 enhanced its information content. Since SFAS 146 is a principles-based standard, this result appears to allay concerns that such standards allow greater managerial manipulation and distort information.