Restructuring Charges Research Articles

Assessing the Financial Stability & Investment Potential of Pfizer Inc.

Pfizer Inc., one of the world’s leading pharmaceutical companies, its performance of the pharmaceutical industry is currently under the spotlight as the market leader in the area, especially in light of the impact of the COVID-19 epidemic starting at the end of 2019. Based on the financial reports and performance status of Pfizer Inc., and its competitors’(AstraZeneca, Merck Pharmaceuticals, and AbbVie) performances in the last two years, important changes in accounting policy, performance evaluation, and overall future strategic development of Pfizer are analyzed and evaluated. As a company that keeps paying more attention to biopharmaceuticals and acquisition, analysis regarding R&D, restructuring charges and risk management will be highlighted. At the same time, comparing Pfizer with the other three companies, analyzing their strengths and weaknesses, and forecasting Pfizer's 2023 development and total stock market capitalization is of great importance. For Pfizer, 2023 will be a turning point and critical year that will determine future product development and total sales performance in the 2023 financial year.

Viable transformation of an electric utility? The case of the Puerto Rico electric power authority

There are similarities that Puerto Rico’s electric grid transformation has with other jurisdictions in terms of integration of distributed energy resources (DERs), net energy metering (NEM) and a diversified energy mix. However, it is important to first evaluate the impacts of Puerto Rico’s debt restructuring in view of federal emergency funds to be deployed. This paper aims to analyze expected impacts of the restructuring agreement and related plans on Puerto Rico’s economy and on its electric utility, PREPA. A restructuring agreement, and related plans, that considers a charge that starts at 2.768 cents per Kwh; that its length is 47 years; that comprises a nonbypassable and unavoidable charge, including on energy generated by consumers; and that excludes the regulator from the evaluation and implementation of debt restructuring charges, it is worth to analyze.

Differential performance impacts of outsider and insider interim CEO successions

ABSTRACT This study finds differential performance impacts of outsider and insider interim CEO successions. Stock markets react incrementally positively to interim CEO successions when the interim CEOs are from outside rather than inside firms. Relative to insider interim CEOs, outsider interim CEOs produce worse earnings performance and greater restructuring charges during their services but lead more frequently to outsider permanent CEO appointments followed by better long-term earnings performance. Our findings suggest that market reactions to interim CEO successions rationally impound the investors’ expectation that outsider relative to insider interim CEO successions will generate greater short-term disruption but pave the way for greater long-term performance improvement.

Non‐GAAP earnings disclosure post 2010 SEC regulation change

AbstractIn this article, we explore the disclosure of non‐GAAP earnings by large, publicly traded companies, and the possible impact of the 2010 change in Regulation G and S‐K on corporate reporting behavior. The reporting of non‐GAAP earnings measures is not required for public companies, nor are these measures audited. There exists considerable leeway in the manner and extent to which companies can report and calculate non‐Generally Accepted Accounting Principles (GAAP) earnings. Not surprisingly, non‐GAAP reporting standards are a concern for regulators trying to uphold the consistency and comparability of financial reporting. We collected the fourth quarter earnings releases of Standard and Poor's (S&P) 100 companies for the years 2010 through 2016 to study their reported annual non‐GAAP earnings disclosures, if any. Adjustments made to GAAP earnings were classified into eight common categories (e.g., Restructuring Charges, Tax Related Benefits/Charges) in order to calculate the magnitude, materiality, and nature of the adjustments reported. Our analysis shows that the number of companies reporting non‐GAAP earnings increased over our period of study, with a significant increase occurring after the 2010 liberalization of the Regulation G rules. We found an increase in all categories of adjustments and that most were −10% to +10% of net income. The median values of adjustments were positive in almost all the categories indicating non‐GAAP adjustments generally increase non‐GAAP net earnings. We observed many instances of companies reporting the same category of non‐GAAP earnings over multiple years. Further, we find that companies that do not report non‐GAAP earnings have higher market capitalizations than non‐GAAP earnings reporters. This study contributes to the research of non‐GAAP earnings reporting with an extensive analysis of the disclosure, the nature and magnitude of adjustments companies report, and the characteristics of those companies that choose to disclose.

A new era of voluntary disclosure? Empirical evidence on how employee postings on social media relate to future corporate disclosures

With the advent of social media, individual public opinions about firms can be more easily accessed and aggregated, and recent research suggests that various platforms, such as Twitter, Seeking Alpha, and Estimize, provide information relevant in predicting future corporate disclosures. Rather than focusing on the general public's opinion, we examine a public platform designed to convey insider information - Glassdoor.com, where employees voluntarily share their opinions on a number of issues, including the company's near-term business outlook. Using a sample of approximately 150,000 employee reviews, we extract both employees' explicit assessments of outlook and a measure of their latent outlook derived from factor analysis. We then examine whether the opinions employees share on social media relate to future corporate disclosures. In particular, we find evidence that employee opinions are useful in predicting growth in key income statement information, transitory reporting items (e.g., restructuring charges), earnings surprises, and management forecast news. While voluntary disclosures about firm performance have traditionally come from executives, our evidence suggests that rank-and-file employees are chipping away at upper-level management's exclusive control over that channel.

Hidden in the Woodshed: Big Bath Herding

This paper demonstrates that bad news herding is actually accompanied by bad news over-reporting. By focusing on write-offs during two major recessions of 2001 and 2008 and taking advantage of a unique hand-collected dataset on reversals of restructuring charges, we document that when firms herd in their negative reports, they over-state bad news, creating a cushion that can be reversed in the future. Specifically, we show that: (1) large write-offs by early firms are followed by clustered write-offs by their peer firms; (2) herding firms over-report and subsequently partially reverse their write-offs; and (3) the reversals help herding firms to meet financial analysts’ earnings forecasts that otherwise would not be met. Taken together, these results lend credence to the following mechanism behind bad news herding: firms strategically engage in herding with excessive bad news reports to benefit from subsequent reversals.

Restructuring Charges, FAS 146, and the Accrual Anomaly

In this study, we examine the role of restructuring charges in the existence and subsequent weakening of the widely documented accrual anomaly. We find that prior to 2003, the significant positive abnormal hedge returns experienced by accrual based strategies were influenced by a subset of firms with high restructuring charges. After 2003, with the introduction of the Statement of Financial Accounting Standards No. 146 changing the accounting for restructuring charges, restructuring firms no longer experience significant abnormal returns, thereby weakening the accrual anomaly. Our results suggest that the regulatory changes have had an effect on impairing the role of restructuring charges in the accrual anomaly by improving the market’s ability to correctly assess the valuation implications of restructuring charges in the low accruals portfolios. This paper was accepted by Mary Barth, accounting.

A New Era of Voluntary Disclosure? Empirical Evidence on the Informativeness of Rank-and-File Employees' Business Outlook

With the advent of social media, individual public opinions about firms can be more easily accessed and aggregated, and recent research suggests that various platforms, such as Twitter, Seeking Alpha, and Estimize, provide information relevant in predicting future corporate disclosures. Rather than focusing on the general public's opinion, we examine a public platform designed to convey insider information - Glassdoor.com, where employees voluntarily share their opinions on a number of issues, including the company's near-term business outlook. Using a sample of approximately 150,000 employee reviews, we extract both employees' explicit assessments of outlook and a measure of their latent outlook derived from factor analysis. We then examine whether the opinions employees share on social media relate to future corporate disclosures. In particular, we find evidence that employee opinions are useful in predicting growth in key income statement information, transitory reporting items (e.g., restructuring charges), earnings surprises, and management forecast news. While voluntary disclosures about firm performance have traditionally come from executives, our evidence suggests that rank-and-file employees are chipping away at upper-level management's exclusive control over that channel.

Olin trimming chlorine after merger

Following its acquisition of Dow Chemical’s chlorine chemicals business last year, Olin will soon complete a shutdown of 433,000 metric tons of annual chlorine capacity across three U.S. plants. The company has reduced chlorine output at its Niagara Falls, N.Y., plant. By the end of this month, the company will close chlorine production at its Henderson, Nev., facility, which is being reconfigured to make bleach and distribute caustic soda and hydrochloric acid. The biggest reduction will come at Dow’s former chlor-alkali plant in Freeport, Texas, which will see a decrease of 220,000 metric tons of production, about 7% of the site’s capacity. The company will take $95 million in restructuring charges because of the closures.

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

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.

Analystss Cash Flow Forecasts and the Decline of the Accruals Anomaly

The accruals anomaly, demonstrated by Sloan (1996), generated significant excess returns consistently for over four decades until 2002, but has apparently weakened in the subsequent period. In this paper, I argue that one factor responsible for this decline is the increasing incidence of analysts’ cash flow forecasts that provides markets with forecasts of future accruals. The negative relationship between accruals and future returns is significantly weaker in the presence of cash flow forecasts. This anomalous relationship becomes weaker with the initiation cash flow forecasts but continues after cash flow forecasts are terminated. Further, the mitigating effect of cash flow forecasts is greater for forecasts that are more accurate. The results are incremental to explanations based on the improved accrual quality, reduced manipulation of special items and restructuring charges and greater investment in accruals strategies by hedge funds and highlight the increasing importance of analysts’ cash flow forecasts in the appropriate valuation of stocks.

An examination of restructuring charges surrounding the implementation of SFAS 146

This paper provides evidence on how the adoption of Statement of Financial Accounting Standards (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), has changed (1) restructuring-related earnings management, (2) the effect of restructurings on future operating performance, and (3) stock price responses to restructuring announcements. I find that restructuring charges reported after SFAS 146 have a weaker association with smoothing behavior. More importantly, I document that an improvement in future earnings following a normal restructuring charge is attenuated under SFAS 146, consistent with the standard’s adoption resulting in smaller and more frequent (i.e., more persistent) restructuring charges. I further document that the market places a higher valuation multiple on restructuring charges in the post-SFAS 146 regime, compared to the pre-SFAS 146 regime. Therefore the overall results suggest that the market appears to understand the higher persistence of restructuring charges reported under SFAS 146 and values the charges accordingly.

Executive Succession and Post-Restructuring Performance Improvement and Financial Reporting Quality

We investigate the impact of CEO turnover in connection with corporate restructurings on subsequent performance improvement and accounting quality. Although operational restructurings are credited with performance improvements, prior studies suggest companies potentially manipulate restructuring charges to mask true economic performance. We document significant improvements in post-restructuring investment efficiency and operating performance with no differentiation between firms that experience pre-restructuring CEO turnovers and those that do not. However, continuing managers are more likely to display opportunistic behavior, suggesting their performance improvements are less consistent with real economic changes than pre-restructuring turnover firms. This difference in accounting quality is also more pronounced for firms with outside replacements. Overall, our findings suggest that the threat of managerial termination can effectively induce managers to undertake appropriate actions and commit to higher reporting quality in poorly performing firms.

Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

ABSTRACT Burgstahler et al. (2002) investigate the implications of special items for future earnings and report that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an “inter-period transfer” device. We extend their analysis and find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In particular, we find that future earnings increase over the subsequent 16 quarters by more than 130 percent of the reported negative special item. The earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns suggest that negative special items also signal real future performance improvements (i.e., performance improvement hypothesis) in addition to inter-period expense transfer (i.e., inter-period transfer hypothesis). Moreover, the real improvement effect appears to be driven by restructuring charges, the most prevalent type of special item.

Does Regulation Fair Disclosure affect analysts’ forecast performance? The case of restructuring firms

The main purpose of this paper is to investigate how the enactment of Regulation Fair Disclosure (Reg. FD) influences analysts’ forecast characteristics for restructuring firms. The Reg. FD requires all firms disseminate material information not only to some institutional investors and certain financial analysts, but to all market participants simultaneously. We expect that the regulatory effect of Reg. FD on financial analysts’ forecast performance would be pronounced because of uncertain earnings signals and information complexity produced by restructuring activities. Particularly, we examine how the enactment of Reg. FD affects the relationship between analysts’ earnings forecast attributes and the occurrence and magnitude of restructuring charges. Our general finding is that analysts’ forecast errors and forecast dispersion have declined in the post-FD period for restructuring firms. However, such an impact cannot be persistent with an increase in the relative magnitude of restructuring charges, the proxy for restructuring complexity. This study provides additional evidence that Reg. FD has limited private information, and attempts to provide all users with the same access to information within the context of firms reporting restructuring charges.

Earning Management: Is it Good or Bad?

Use of accounting discretion to address financial statements seems to be eroding public confidence in the financial reporting process. Some managers are abusing GAAP’s afforded discretion to manage earnings thus reducing the quality of the financial reporting process and ultimately bring adverse effects on resource allocation in the economy. Market participants, legislators, regulators, and academics are concerned in order for them to have the need to control financial reporting abuses. In this paper, I briefly analyze the recent literature and theories on earnings management and show the techniques used by managers to manipulate earnings. I found strong incentives and reasons for managers to report such smooth and increasing earnings by the: a) increase market capitalization; b) enhance management compensation and job security; and c) reduce the company’s cost of capital. The evidence found suggests that the managers used: a) big bath restructuring charges; b) miscellaneous cookie jar reserves (a hidden reserve that do not show up on the balance sheet (understating values) which can be used to adjust quarterly earnings reports c) premature and aggressive revenue recognition; and d) creative acquisition accounting and purchased R&D to manage earnings.

The Relation Between Disaggregated Re-structuring Charges And Stock Returns: The Effects Of Financial Distress

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><em><span style="font-family: Times New Roman;">We examine the relation between restructuring charge components and stock returns for firms reporting restructuring charges in the year disaggregated component disclosure became mandatory. We find significant coefficients on disaggregated components of restructuring charges in a regression of returns on earnings, earnings changes, and restructuring charge components. We provide evidence that for firms that exhibit signs of financial distress, aggregate restructuring charges, as well as the disaggregated components of restructuring charges, are priced differently than they are for financially healthy firms. Results suggest that for financially distressed firms, investors perceive supplemental disclosure as a positive signal of the firm’s future operating performance, and view negatively a disclosure that lacks detail and/or clarity.<span style="mso-spacerun: yes;">  </span></span></em></span></p>

Determinants Of Reporting Nonrecurring Charges Subsequent To Business Combinations

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman; font-size: x-small;">This study examines nonrecurring earnings charges following business combinations and the characteristics that influence their reporting.<span style="mso-spacerun: yes;">  </span>The study uses a sample of 216 business combinations in which the acquiring firm reported either goodwill or other asset impairments or restructuring charges with respect to a target firm.<span style="mso-spacerun: yes;">  </span>The results show that changes in the level of CEO cash compensation and institutional ownership are factors that are positively associated with nonrecurring earnings charges in the post-acquisition period.<span style="mso-spacerun: yes;">  </span>The findings suggest that the transparency of nonrecurring transactions subsequent to a business combination is evident with the expense treatment of acquisition-related costs.</span></p>

Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

Burgstahler et al. (2002) evaluate special items, a component of earnings with time series properties that differ from recurring earnings, to determine whether the market correctly prices these transitory items. In addition, they investigate the implications of special items for future earnings and report evidence consistent with the notion that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an “inter-period transfer” device. We examine additional predictions suggested by the inter-period transfer hypothesis. We find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In addition, we find that the future earnings increases over the subsequent 16 quarters amount to over 130 percent of the negative special item reported in quarter t and over 40 percent of these increases are realized in operating cash flows. These earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns are more consistent with negative special items, and in particular restructuring charges, signaling real future performance improvements (i.e., performance improvement hypothesis) rather than inter-period expense transfer (i.e., inter-period transfer hypothesis).

Earnings management following chief executive officer changes: the effect of contemporaneous chairperson and chief financial officer appointments

AbstractUsing a sample of listed Australian firms from 1999 to 2007, we examine the relationship between discretionary accruals and concurrent senior management appointments. Employing panel data regression models and focusing on a measure of discretionary accruals that excludes the effect of transparent write‐downs such as restructuring charges, we find that chief executive officer (CEO) appointments, as a general phenomenon, are not significantly associated with opaque earnings management in the year of appointment or the following year. However, we find that CEO changes accompanied by a concurrent change in board chairperson are associated with significant income‐decreasing earnings management in the year of appointment. We detect no significant relationship between contemporaneous CEO and chief financial officer changes and discretionary accruals. We find no evidence of earnings management in the first compete financial period following CEO appointment, regardless of whether or not concurrent Chair or chief financial officer appointments occurred.