The value-relevance of current and forward-looking accounting information subsequent to a corporate restructuring

Abstract

Abstract When a company recognizes a restructuring charge, current operating earnings are reduced by the accrued estimated costs of a typically multiyear restructuring plan. Given the magnitude and non-recurring nature of the charge, analysts and the popular press often attempt to remove the effects of the restructuring and focus on pre-charge earnings. Thus, the restructuring phenomenon raises concerns about the value-relevance of fundamental accounting data. This paper investigates this issue by assessing the value-relevance of both current and forward-looking accounting information for a sample of restructured firms. We use a residual income valuation model that is based on book value and projected abnormal earnings to uniquely capture the accounting dynamics of the restructuring event. The explanatory power of this valuation model is consistently higher than models based on current earnings even after controlling for the non-recurring charge. The results also indicate that the value-relevance of earnings declines following a restructuring, while the forward-looking information marginally increases in explanatory power. These results suggest that subsequent to a restructuring, investors price the dissipation of owners' equity reflected in current book value and augment that book value with more forward-looking accounting information consistent with the residual income model.