Antecedents and outcomes of corporate refocusing

Journal of Management 1996, Vol. 22, No. 3.439-483

Antecedents and Outcomes of Corporate Refocusing Richard A. Johnson University of Missouri-Columbia During the 1980s a large number of firms refocused or downscoped using multiple divestitures. This paper reviews recent empirical research (1983-1996) to isolate and identify the antecedent conditions that lead to downscoping and its outcomes. Antecedent conditions include changing environmental conditions, firm governance, ineffective strategy, poorperformance, andjinancial restructuring. Outcomes of the process examine how firm strategy has changed and its effect on employees and firm performance. I develop a model to classify research into topic areas and discuss future research directions and related issues.

The decade of the 1980s is well known for the amount and nature of restructuring among large corporations (e.g., 1,200 divestitures worth $59.9 billion in 1986 alone; 2,540 leveraged buyouts (LBOs) worth $297 billion between 198 1 and 1989;and a staggering 55,000 mergers and acquisitions worth just under $2 trillion dollars between 1981 and 1989) (Jensen, 1993; Mergers & Acquisitions, 1990). The impact of these restructuring activities has been felt in almost every sector of the U.S. and European economies (Bowman & Singh, 1993; Markides, 1992b). One of the current problems facing researchers working in this area is the topic’s breadth. Restructuring may imply expansion of the firm through mergers and acquisitions (e.g., Hoskisson & Hitt, 1990; Palmer, Zhou, Barber & SoysaL1995; Prechel, 1994) or contraction through divestitures (e.g., Comment & Jarrell, 1995; Hoskisson & Hitt, 1994; Markides, 1992b). Others have used the term restructuring to imply financial reorganization of the firm through LBOs (e.g., Fox & Marcus, 1992; Lei & Hitt, 1995), as well as recapitalizations, share repurchases, equity carve-outs, and employee stock option plans [ESOPs] (e.g., Schipper & Smith, 1986; Stewart & Glassman, 1988). Still others have used restructuring to describe internal reorganizations, changes in firm structure (e.g., Amburgey, Kelly & Barnett, 1993; Brickley & Van Drunen, 1990; Robins, 1993; Zajac & Kraatz, 1993), or downsizing (layoffs) [e.g., Worrel, Davidson & Sharma, 19911. Direct all correspondence to: Richard A. Johnson, University of Missouri-Columbia, Department of Management, College of Business and Public Administration, Columbia, Copyright 0 1996 by JAI Press Inc. 0149-2063 439

233 Middlebush MO 652 11.

Hall,

RICHARD

440

A. JOHNSON

Corporate restructuring encompasses multiple forms of change in organizations which we can separate into three different categories: portfolio restructuring, financial restructuring, and organizational restructuring (Bowman & Singh, 1993; Gibbs, 1993; Stewart & Glassman, 1988). Portfolio restructuring may occur through the sale or spin-off of lines of business as well as mergers and acquisitions. Financial restructuring encompasses LBOs, stock repurchases, ESOPs, equity carve-outs, or recapitalizations. Organizational restructuring is intended to increase efficiency through changes in organizational structure, internal reorganizations, or downsizing. Because there are so many different types of restructuring, researchers face a certain amount of confusion as to what type of strategic change they are examining. To make matters worse, many of the aforementioned types of restructuring occur simultaneously or sequentially (e.g., Gibbs, 1993; Hoskisson, Johnson & Moesel, 1994; Schipper & Smith, 1986; Wiersema & Liebeskind, 1995). Resparchers, then, must carefully examine the nature of the restructuring before they can put any findings into context. Given the scope of corporate restructuring, it is not feasible to attempt to evaluate all the research done in all these areas. One of the areas that has received considerable attention in the past 10 years is portfolio or asset restructuring. Recently, Hoskisson and Hitt (1990) provided a comprehensive review of firm diversification and included the effects of mergers and acquisitions (a form of portfolio restructuring). This paper addresses a similar topic, but from a different perspective. The focus of this study is on corporate refocusing or downscoping. Corporate refocusing, downscoping, and de-diversification relate to the process of reducing diversified scope through sell-offs, spin-offs, or split-ups and, thus, are a subset of portfolio restructuring (Hoskisson & Johnson, 1992; Hoskisson & Turk, 1990; Ma&ides, 1992a, 1992b). The goal of this paper is to provide a systematic and comprehensive review of the antecedents and outcomes of refocusing and offer suggestions for future research.

Corporate Refocusing: The Phenomenon There is increasing evidence in the business press (e.g., “Splitting Up,” 1985; “Surge in Restructuring,” 1985; Lichtenberg, 1990) as well as in the academic literature (e.g., Bhagat, Shleifer & Vishny, 1990; Comment & Jarrell, 1995; Hoskisson & Turk, 1990; Markides, 1992a, 1992b; Porter, 1987; Williams, Paez & Sanders, 1988) that during the 1980s many U.S. firms engaged in corporate refocusing. Markides (1990) estimates at least 20 percent (and perhaps as many as 50 percent) of Fortune 500 firms refocused between 198 1 and 1987. Markides (1990) further estimates that this type of restructuring occurred in only about 1 percent of the firms during the 1960s and 1970s. Although it is assumed that conglomerate firms are refocusing (Lee & Cooperman, 1989; Williams et al., 1988), Hoskisson and Johnson (1992) provide evidence that the majority of firms refocusing are not unrelated diversifiers; rather, they are firms that combine related and unrelated units in their portfolios. Furthermore, Markides (1992b) presents evidence to suggest that refocusing is equally likely among the Fortune400-500as it is with JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

REFOCUSING

441

the Fortune 100. Corporate refocusing appears to be a widespread phenomenon that is not limited to very large firms. The question we are left with is: Why has corporate refocusing or downscoping become so prevalent in the 1980s and early 199Os? A related but equally important question is: What are the outcomes of refocusing (i.e., has it worked)? To examine these issues, I have organized the paper into three distinct sections: (1) the antecedents of refocusing, (2) the outcomes of refocusing, and (3) future research directions and related issues.

Overview of Model To examine the above issues I present a model relating antecedent conditions, downscoping, and outcomes in Figure 1. The discussion of the model first centers on antecedent conditions that lead to downscoping. Researchers have offered several alternatives as triggers for the recent downscoping activity. Some have speculated that tax (Hoskisson & Hitt, 1990; Turk & Baysinger, 1989) and/or antitrust policy (Shleifer & Vishny, 1991) changes triggered the realignment of assets among diversified firms in the early 1980s. As antitrust enforcement was relaxed, firms could engage in mergers with less likelihood of interference from the federal government. In addition, the advent of junk-bond financing supplied the needed funds to remove size as a deterrent to takeover (Bhide, 1990). This opened the management of America’s largest corporations to monitoring and discipline from capital markets (Jensen, 1993). Others have argued that increases in global competition led to refocusing (Ho&&son & Hitt, 1994; Shleifer & Vishny, 1991). These changes in the business environment suggest that ANTECEDENTS

PROCESS

OUTCOMES

STRATEGY

.....

GOVERNANCE

..‘..

STRATEGY

PERFORMANCE .

Figure 1.

Summary Model of the Antecedents and Outcomes of Corporate Refocusing (Downscoping). JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

442

RICHARD A. JOHNSON

firms engage in downscoping to shed unwanted or under-valued assets. In fact, Kaplan and Weisbach (1992) and Williams et al. (1988) provide evidence that the majority of divestitures in the early 1980s were units unrelated to the parent’s core business. Environmental changes thus represent one antecedent of downscoping. However, these events do not explain the continuation of downscoping beyond the early 1980s. Other rationales for downscoping involve firm governance, strategy and performance. Hoskisson, Johnson & Moesel (1994) provide an integrative model that examines the relationship among these three factors. Hoskisson and colleagues argue that inadequate or weak governance allowed managers to utilize free cash flows without adequate controls. When shares are diffusely held, shareholders have insufficient incentive to monitor firm strategy. For example, boards of directors with little equity ownership appear to have little incentive to monitor strategy significantly unless performance suffers (Johnson, Hoskisson & Hitt, 1993). This rationale suggests that the board of directors, ownership, and managerial incentives were inadequate to prevent high levels of diversification and poor strategy formulation (Bethel & Liebeskind, 1993; Hoskisson et al., 1994; Jensen, 1993). The third rationale for downscoping is poor strategy formulation or implementation. Markides (1992a, 1992b, 1995) has argued that firms may have diversified beyond optimal levels, causing performance to suffer. Hoskisson et al. (1994) present evidence that suggests that the majority of firms that refocused exhibited higher levels of diversification than their industry counterparts. In addition, acquisition activity has been shown to be related to increases in debt. While high levels of debt may constrain managers from using free cash flows (Jensen, 1986), they may also reduce a manager’s ability to make investments or weather economic downturns. Lee and Cooperman (1989) argue that many of the firms that restructured did so to reduce the level of debt. High levels of debt and diversification also have a negative effect on a firm’s R&D intensity (Baysinger & Hoskisson, 1989; Hoskisson & Hitt, 1988). Reductions in R&D expenditures may lead to a loss of competitiveness and a decline in performance. Hence, firm strategy represents an antecedent to downscoping. The fourth rationale for downscoping is poor performance. Poor performance represents the most studied antecedent of downscoping (Ravenscraft & Scherer, 1987). Poor firm performance or business unit performance signals the need for change. In fact, several studies report that managers cite poor performance as a major motivation for sell-offs (e.g., Duhaime & Grant, 1984, Ravenscraft & Scherer, 1991). Given the increased activity in the market for corporate control, managers have the incentive to voluntarily restructure the firm to avoid takeovers. The final antecedent is financial restructuring. As stated previously, financial restructuring and asset restructuring (downscoping) may occur simultaneously or sequentially. Many firms engaging in restructuring engage in both types of restmcturing. For example, Seth and Easterwood (1993) provide evidence that many firms engaging in LBOs (financial restructuring) end up divesting units that no longer fit firm strategy. In this context, financial restructuring may lead to downscoping as managers attempt to increase firm efficiency and pay down debt. The dashed line running from downscoping to financial restructuring in Figure 1 is JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

REFOCUSING

443

meant to indicate that stock repurchases, ESOPs, and recapitalizations may occur anytime during downscoping. The model presented in Figure 1 is a simplified version of the process. The dashed lines linking the different antecedents indicate that all the antecedents may be interrelated. For example, Smart and Hitt (1994, 1996) present theory and evidence to suggest that we can use firm strategy and performance to predict both financial restructuring and downscoping. For a more detailed representation of the interrelationships, see Hoskisson et al. (1994) and Smart and Hitt (1994). The second section of the model examines the outcomes of downscoping. Research in this area can be classified into three primary categories: (1) strategy outcomes (how has strategy changed), (2) the effect on firm employees (morale, turnover, and layoffs), and (3) the performance implications of downscoping (both short-term market reactions and longer-term evaluations). One area I did not include is the effect of downscoping on corporate governance; I did this because virtually no studies examine post-restructuring governance of the parent firm. Antecedents

of Downscoping

The following section examines empirical research investigating the antecedents of downscoping presented above. We examine each of the antecedents, in turn, as presented in Figure 1 and Table 1. Table 1 presents the articles I examine in this review by path category. Each entry lists the author and year, type of data used, and the study’s findings. As mentioned above, numerous Path 1: Environment to Downscoping. studies predict a relationship between environmental conditions and corporate downscoping. Researchers have argued for tax rationales, antitrust policy changes, high-yield (junk) bond financing, global competition and takeover activity through the market for corporate control as reasons for the increase in restructuring activity in the early 1980s. For example, Kose, Lang and Netter (1992) conducted field interviews with executives from 46 firms that underwent voluntary restructuring during the 1980s. They found that 95 percent of managers blamed economic conditions, 57 percent competitors, and 43 percent foreign competitors for poor performance and the need to restructure. The only empirical research examining the effect of antitrust policy and global competition on refocusing was conducted by Liebeskind and Opler (1993). Liebeskind and Opler (1993) did not find support for either antitrust or global competition arguments as antecedents of refocusing; however, their results suggest that firms with high market shares competing in concentrated industries were more likely to emphasize their core business. It is possible to reconcile these differences if we assume that managerial perceptions may be fundamentally different from industry-level predictors. Managerial perceptions may provide a tighter link between the antecedent conditions leading to refocusing, the mode of refocusing, and the eventual outcome. Environmental pressure to refocus may also occur due to tender offers or the threat of takeover. Chatterjee (1992) presents results indicating that the value created through a takeover (including subsequent divestitures) can be duplicated if top management refocuses the firm by itself. He further argues that if the expected gains are due to synergy, then the firm’s shareholders may be better off to accept JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

Studies Exa~ning

Paper examines the source of takeover gains and suggests that if synergy gains are dominant then the takeover should be accepted. Results suggest that restructuring motivated the sample studied and that target frms can create the same value through restructuring. Results also suggest that the need to restructure was industry wide. Findings suggest that firms that did not restructure exhibited stronger governance (i.e., greater outside director representation, higher board ownership, and more large blockholders) than restructuring firms. Changes in the industry led to “aspiration-induced crisis (gap between where the firm was versus where management wanted it to be). Changes in CEO and external stakeholder pressure for change provided additional motivation. Most firms first cut costs, instituted financial controls and returned to their core business. Firms used plant closures, asset sales and related acquisitions to improve performance.

108 target firms that defeated a tender offer (57 eventually restructured).

79 firms that successfully defeated a tender offer between 1963 and 1986. 36 firms restructured within 3 years of defeating the offer.

25 firms in the U.K. which reversed performance declines to achieve sustained pe~o~~ce.

Chatterjee & Kosnik (1995)

Grinyer & McKieman (1990)

G

Chatterjee (1992)

Findings or lmplic~t~ons

(D~wns~oping)

Eased on a transactions cost model, results suggest that increases in environmental uncertainty lead to divestitures while decreases lead to acquisitions. Firms with intermediate levels of diversification divest more when uncertainty is high and acquire more when unce~inty is low relative to other levels of diversi~cation.

of Corporate Refocusing

Panel of 168 Fortune 500 firms between 1985and1990

Lkta

the Antecedents

Bergh & Lawless (1992)

Antecedents

Path 1: Environment to Downscoping Other S&Y

Table 1.

CORPORATE REFOCUSING

JOURNAL OF MANAGEMENT, VOL. 22, NO. 3,1996

Results support the premise that restructuring (both asset and financial) is a function of free cash flows in the presence of weak governance when triggered by a takeover threat. In addition, both the level of diversification and leverage were positively related to decreased diversity. Board and management equity holdings were positively related to reductions in diversity. Lastly, portfolio restructuring is positively correlated with both increased leverage and financial restructuring. Paper examines how board size and diversity affects the board’s ability to initiate strategic changes during periods of environmental turbulence, Strategic change was defined using three variables: service divestitures, service reorganizations, and service additions. Results suggest that diverse boards are less likely to initiate strategic change than homogeneous boards.

45 asset restructuring and 56 financial restructuring firms that restructured between 1982- 1987.23% of these firms received a tender offer prior to restructuring (involuntary restructuring).

334 hospitals in California between

Gibbs (1993)

Goodstein, Gautam & Boeker ( 1994)

1980-1985.

During the 198Os, GM reversed its extensive diversi~cation and returned to its traditional core business. Restructuring was undertaken without external market pressure. Reflects the effectiveness of internal governance.

See above

Findings or Implications

Detailed case history of the voluntary restructuring at General Mills through field interviews.

E

Data

Continued

Donaldson (1990)

Chatteriee & Kosnik (1995)”

Antecedents

P&it 2: Governance to ~ownscoping Other Study

Table 1.

Smart & Hitt (1996)

Johnson, Hoskisson & Hitt (1993)

Johnson & Bergh (1994)

Hoskisson, Johnson & Moesel(1994)

S

S, P

Paper tests for the effects of different types of ownership on acquisitions and divestitures and then creates clusters based on ownership in firms: Institutional investor-controlled, blockholder-controlled, and a mixed category where no group dominates. Results suggest that all three groups prefer related acquisitions when performance is high and avoid them when performance is low. All three types prefer unrelated divestitures when performance is low. Lastly, institutional-controlled firms prefer the greatest number of divestitures while blockholders prefer fewer changes. Firms with mixed ownership preferred more divestitures than blockholder-controlled but fewer divestitures than institutional-controlled firms. Board involvement in restructuring (refocusing) is negatively affected by TMT tenure, TMT organization tenure and TMT education level. Results suggest TMT power can minimize board involvement even during performance declines. Strategic control usage was negatively related to restructuring. Outside director representation and equity holdings were positively related to board involvement. Results suggest that agency costs may be a stronger determinant of asset restructuring than financial restructuring (LBOs). Contrary to accepted views, high performance, concentrated ownership, and smaller size were antecedents of LBOs while low performance, high levels of diversification and firm age were related to asset restructuring.

183 firms randomly sampled in 1986. Firms were tracked for 5 years to determine divestiture and acquisition activity. Activity had to be voluntary (no tender offers).

92 TMT/insider board members from firms that initiated a significant voluntary restructuring (- 10%) of their assets between 1985-1990.

Sample of 171 firms including 108 divesting firms and 63 LBOs between 1983-1984 and 1987-1988. Sell-offs had to be voluntary and compose at least 10% of firm assets.

(Continued)

Paper tests a structural equation model that posits that divestiture intensity is directly related to firm performance and strategy, which are in turn preceded by weak governance. Results suggest that blockholder equity discourages high levels of diversification. Outside director equity is negatively related to divestment intensity. Both debt and diversification were positively related to divestment intensity while firm performance (market performance) was negatively related. Lastly, market performance mediates the relationship between accounting performance and divestiture intensity.

203 firms that voluntarily divested at least 10% of their assets in announced restructuring plans between 1985 and 1990.

Longitudinal data from 772 manufacturing t%rns between 19811989.

Field research and interviews with Results suggest that the business unit’s strength (performance executives from 40 large diversified relative to other units), its relationship to other units, and the parent firms that made at least one divestment firm’s financial position (relative to industry financial strength) between 19751980. The divestment had influence divestiture. Low managerial attachment and economic to be voluntary and considered. environment hypotheses as motivations for divestment were not significant by the firm. supported.

Survey data collected from 59 large firms in New Zealand. 36 firms that made 208 divestitures between 19851990.

P

P

P

Chang ( 1996)

Duhaime & Grant (1984)

Hamilton & Chow (1993)

Paper examines the differences between divesting and non-divesting tirms and the motives which led to divestment. The divesting firms were considerably larger and fast growing (sales growth) than nondivestors. The typical divestiture was motivated by the need to convert unattractive assets into liquid form that could be used to strengthen the balance sheet or be reinvested in the core business or in other areas.

See above A hazard-function is estimated based on firm entry and exit from businesses. Relative performance (weighted measure of ROA and operating cash flows) is strongly related to divestitures (exit). Large firms tend not to divest as often as smaller firms when faced with the same performance gap possibly due to slack resources. Lines of business that are dissimilar in terms of knowledge base or human resource profile from the other units are more likely to be divested.

Findings or Implications

G

Data

Continued

Bergh (1995)

Ant~rdmts

Path 3: Strategy to Downscoping Other Study

Table 1.

%

z!

Z

5 8 g L $

m

G, P

Hoskisson, Johnson & Moesel(l994)

Markides (1992b)

E, P

P

Lang, Pouben & Stulz (1995)

Liebeskind & Opler (1993)

G

Johnson, Hoskisson & Hitt (1993)

ho (1995)

P

Hoskisson & Johnson (1992)

250 firms from the Fortune 500.201 firms that voluntarily refocused between 1981-1985.

See above

77 firms that engaged in voluntary asset sales between 1984 and 1989.

See above

fillllS.

180 spin-offs undertaken by Japanese

See above

189 firms that voluntarily restructured between 1981-1987. Firms had to divest at least 10% of their assets and announced the refocusing to the investment community (e.g., NW, etc.)

-

(Continued)

that did not. Refocusing firms were found to be highly diversified and exhibiting poor performance relative to industry counterparts. The higher the R&D intensity of the core business, the lower the likelihood that the firm would refocus. Lastly, a firm was more likely to refocus on its core business if the industry was attractive.

Paper examines the characteristics of firms that refocused versus those

Management sells assets when doing so provides the cheapest funds to pursue objectives rather than for operating efficiencies alone (i.e., performance improvement).

Paper examines the use of spin-offs as an instrument to achieve corporate growth. Transaction cost theory is used to explain spin-offs as a method to balance costs associated with diverse businesses, generate growth based on core competencies, and pursue an efficient internal Iabor market.

Paper hypothesizes that restructuring activity focused on firms at intermediate levels of diversification (e.g., related-linked) due to control system inefficiencies. Results confirm that the majority of firms in the sample were related-liked and that they moved towards either related or unrelated strategies during refocusing. On average, refocusing firms were performing below the industry average in the pre-restructuring phase.

62 asset sales by firms between 1979 and 1988 to remedy a pre-existing or anticipated default, avoid bankruptcy, or facilitate debt res~ctu~ng.

See above

Brown, James & Mooradian (1994)

Charm (1996)

S

Sample of 39 single divestitures (firms with multiple divestitures were deleted) between 1964-1973.

See above

772 public corporations in the industrial manufacturing segment which had COMPUSTAT and TRINET data between 1981-1989.

Findings or Implications

Firms engaging in divestitures do so to improve performance generate funds for the cash constrained firm.

and to

Results indicate that voluntary sell-offs generally occur after a period of abnormally negative returns.

Results support that business turnover (exit) is prompted by poor performance but that some turnover is a consequence of exploration, 43% of entries into new markets (through acquisition and internal development) were turned over by the end of the study. 42.6% of acquisitions and 43.5% of internal developed business were divested. Turned-over units exhibited both lower relatedness and growth compared to those units that were retained.

Study presents a hazard-function model to determine factors which precipitate sell-offs. The best predictor was business unit performance (low profits lead to sell-off). Sell-offs were more likely when company-wide performance was poor, the lower the line’s market share, the lower the R&D/sales ratio, and in the aftermath of CEO change. Units acquired in conglomerate mergers were more likely to be sold off than original units.

Continued

Sample of 450 companies between 1975 1981.285 lines of business sold-off were compared to 2157 retained lines.

Data

Table 1.

Alexander, Benson & Kampmeyer (1984)

Path 4: Performance to Downscoping

G, P

P

Singh & Chang (1996)

Smart & Hitt (1996)

P

Ravenscraft & Scherer (1991)

Path 3: Strategy to Downscoping Study Other Antecedents

See above

Ravenscraft & Scherer (1991)

(Continued)

Firms which tend to divest tend to be weak financially (poor performers). Divestors had significantly lower levels of performance (ROA) than matched control firms in the pre-divestment period.

68 voluntary divestments made by Fortune 500 firms between 1976-1979. Non-divesting control fiis were matched to divesting firms.

Montgomery & Thomas (1988)

S

Results indicate that spin-offs took place after a period of generally positive abnormal returns.

See above

See above

55 voluntary spin-off events that took place between 1962-1980.

E, S

S

Miles & Rosenfeld (1983)

Liebeskind & Opler (1993)

Lang, Poulsen & Stulz (1995)

Structured interviews suggest that managers blame the following exogenous factors for poor performance and the need to restructure: economic conditions (95%), competitors (57%), and foreign competitors (43%).

46 voluntarily restructuring fiis with declining performance in the 1980s.

See above

Kose, Lang & Netter (1992)

S

Hoskisson, Johnson & Moesel(1994)

See above

Results suggest that firm performance declined roughly one year prior to divestiture and resulted in negative abnormal returns of -10.8% from day -360 to day -11.

S

Hoskisson &Johnson (1992)

See above

Sample of 1043 large sell-offs (unit sold for at least $10 million).

S

Hamilton & Chow (1993)

See above

Jain (1985)

S

Duhaime & Grant (1984)

R _

IZ a 2

5

:: g g

Notes:

Other Antecedents:

G = Governance,

S = Strategy, and P = Performance.

LB0 firms divested a significantly higher volume of their peripheral and core businesses than the matched control firms.

64 LBOs from the 1000 largest manufacturing firms between 1980 and 1986. A set of control firms were matched to the LB0 sample.

Wiersema & Liebeskind (1995)

E = Environment,

MBOs appear to be a mechanism to refocus the post-buyout firm on more related businesses. Some firms remain private for extended periods of time possibly due to the degree of restructuring required.

32 completed management buyouts of large firms in multiple industries between 1983 and 1989.

Liebeskind, Wiersema & Hansen (1992)

Seth & Easterwood (1993)

See above

See above

Findings or Implications

Managers of LB0 firms downsized corporate operations significantly more than the matched control firms but did not refocus more than control firms.

GS

S

Data

Continued

33 LBOs from the largest 1.500 U.S. firms between 1980 and 1984 matched to a set of control firms.

Smart & Hitt (1996)

Singh & Chang ( 1996)

Path 5: Financial Restructuring to Downscoping Other Study Antecedents

Table 1.

CORPORATE REFOCUSING

453

the tender offer. If, however, the gains relate to restructuring, then the firm should restructure on its own. Additional evidence suggests that the need to restructure was industry wide. This evidence suggests that industry conditions had changed such that the majority of firms were inefficient due to overdiversification. In a related study, Chatterjee and Kosnik (1995) found that firms that restructured after defeating a tender offer exhibited weaker governance structures (lower outside director representation, lower equity ownership by outside directors, and fewer blockholders) than their counterparts that did not restructure. This finding suggests that the managers of firms that restructured considered themselves as either likely candidates for another tender offer, realized the need for change, or were pressured by their board of directors or blockholders to act. Another interesting aspect of this paper is that it examines firms who did not downscope truly voluntarily (the firms restructured after averting a takeover) but were not forced to downscope (i.e., by the government or by the acquirer’s management after takeover). The finding that roughly half of the firms in Chatterjee and Kosnik’s sample failed to restructure suggests that these firms were not in serious trouble and/or that the bidding firm was not seeking to acquire a poorly performing or undervalued firm. This argument would be consistent with Walsh and Kosnik (1993) and Franks and Mayer (1996), who find that corporate raiders may not be constrained to serving a disciplinary role in the market for corporate control. Walsh and Kosnik (1993) provide evidence that many takeovers were not the result of poor performance or undervalued assets. An alternative explanation is that some of these takeovers may be due to managerial hubris (Roll, 1986). Cusatis, Miles and Woohidge (1993) provide additional evidence; they find that firms that have completed restructuring and the units they spun-off generate above-normal returns for the 3 years post-restructuring and that during these 3 years the parent and unit are more likely to be involved in a takeover, Environmental antecedents can also include industry changes. Grinyer and McKieman (1990) argue that restructuring may be brought on by changes in the industry that create an “aspiration-induced crisis” based on the difference between current performance or market share and where top management feels the firm should be. In effect, these firms represent voluntarily restructuring firms that were not doing so poorly that a tender offer was required to initiate change. The articles by Bergh and Lawless (1992) and Meyer, Brooks and Goes (1990) also examine environmental changes and the corresponding changes within the firm. Meyer et al. (1990) examine firm responses to discontinuous change at the industry level. A major upheaval in the hospital industry in San Francisco led to excess capacity, resource scarcity, and regulatory changes. To cope with these changes the hospitals engaged in spin-offs of non-core areas, underwent divestitures of peripheral services, and formed networks among themselves to respond to the need for “managed care” in the Bay Area. Bergh and Lawless (1992) examine environmental uncertainty and its impact on the strategic decisions the firm makes. They argue that the transaction costs of managing a diverse portfolio of units become too problematic under high uncertainty conditions. They find that firms facing highly uncertain conditions engage in divestitures to reduce the costs of managing the portfolio. They also report that managers tend to engage in acquisitions when JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

454

RICHARD A. JOHNSON

uncertainty is low. Results from Bergh and Lawless (1992) Grinyer and McKiernan (1990), and Meyer et al. (1990) suggest that firms encountering radical changes in their environment resort to downscoping to decrease problems in managing diverse businesses and to allow managerial time and energy to focus on the core competency within the firm. At a more macro level, all the studies in this section suggest that changes in the environment that increase turbulence or uncertainty result in an increased likelihood of downscoping. Path 2: Governance to Downscoping. Agency theorists argue that restructuring during the 1980s was a correction for overdiversification in the 1960s and 1970s. During this time period, managers increased firm size and diversified without increasing firm value (Jensen, 1986) because governance systems were inadequate to restrain diversification (Hoskisson & Turk, 1990). This view suggests that the board of directors, ownership concentration (equity held by blockholders), and managerial incentives were ineffective and resulted in the failure of internal goiertrance as a system (Jensen, 1993). Inadequate governance may be related to diffusion of shareholdings among outside owners, characteristics of managers and board members, and board passivity. The discussion in this section deals primarily with voluntary refocusing but does look at two studies that examine the role of governance in refocusings that are a mixture of voluntary and involuntary. In a case history of the voluntary refocusing at General Mills, Donaldson (1990) details the internal pressures that led to GM’s refocusing effort. These internal pressures included: the persistant clash of cultures between business units, resentment concerning reallocation of cash flows to new units, as well as equity issues concerning rewards for performance. Management and the board jointly decided to refocus the firm on packaged food and related services. The study also highlights the important distinction between voluntary and involuntary (forced) restructuring in that management had the time to seek out the best deal. Firms that are under attack or pressured due to high leverage may divest hundreds of millions of dollars in a fire sale, but this places the firm in an impossible bargaining position. Bethel and Liebeskind (1993) found that blockholder ownership (five percent owners) was positively related to reductions in diversified scope, but not to increases in specialization. Buy-ins by blockholders into diffusely held firms was also a significant determinant of downsizing, reductions in diversification, and increases in cash payouts in sample firms. Consistent with agency theory predictions, Bethel and Liebeskind’s results suggest that blockholders have a disciplinary effect on managers. Using a panel of 112 Fortune 500 firms, Bergh (1995) examined external 5 percent owners (no managers or board members) and found that ownership concentration was positively related to the divestiture of unrelated and small units to pursue related and cooperative strategies. Conversely, when managers have power they prefer the divestiture of related and large units to pursue competitive and financial synergies. In a follow-up study to Bergh (1995), Johnson, Bergh and Grossman (1994) found that firm performance moderated the relationship between managerial, blockholder, and institutional ownership with the type of unit sold or acquired. All three ownership groups were associated with the divestiture of unrelated units when firm performance was low and related JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

REFOCUSING

455

acquisitions when performance was high. In addition, institutional investor ownership was associated with significantly more divestitures than blockholders. Managerial equity ownership was associated with fewer divestitures than institutional investors but more than blockholders. Using a somewhat different approach, Smart and Hitt (1996) found that ownership concentration (sum of five percent owners) was positively related to financial restructuring (LBOs), while diffuse ownership was related to refocusing. All four of these studies suggest that ownership concentration is associated with the divestiture of unrelated units, especially when performance is poor. Hoskisson, Johnson and Moesel (1994) examined the relationship between firm governance and divestment intensity. They found an indirect path from blockholders to divestment intensity that was mediated by relative product diversification. These same blockholders had a positive effect on accounting performance in the pre-refocusing period. These findings suggest that blockholders in the early 1980s may not have had a direct influence on refocusing but served as a deterrent to excessive diversification. This negative relationship between blockholders and diversification served to decrease the magnitude of the refocusing effort. Johnson, Hoskisson and Hitt (1993) examined board involvement in the decision to refocus. Using survey data for board involvement, they found that board involvement was more likely as performance declined. It appears that low board involvement was associated with top management initiating refocusing without pressure from the board. Managerial equity holdings and strategic controls were negatively related to board involvement, suggesting that managers had sufficient incentives to initiate action. Recent research has suggested that outside directors have inadequate incentives to monitor unless they have substantial equity stakes in the firm (Kosnik, 1990). This research supports the importance of outside director equity in that board involvement was higher when there were more outsiders on the board and they had substantial equity stakes. Hoskisson et al. (1994) report that outside director equity was negatively related to the number of units divested and the time spent restructuring. This could imply that these directors were efficient monitors, thereby decreasing the intensity of refocusing. In addition, the proportion of outside directors was positively related to debt. Outside directors may use debt as an additional bonding mechanism to decrease free cash flows and reduce managerial discretion. In a similar paper, Goodstein, Gautam and Boeker (1994) examined the effects of board demography on the ability to initiate strategic changes during periods of environmental turbulence. Boards composed of members with heterogeneous occupational backgrounds were less likely to initiate changes such as service divestitures and reorganizations than more homogenous boards. This finding has important implications given the recent calls for larger and more diverse boards to monitor management. The last two studies in this section examine refocusings that are not entirely voluntary in that the firms received tender offers prior to initiating refocusing. Gibbs (1993) found that refocusing was related to weak governance, high levels of free cash flow, and takeover threat. Gibb’s findings suggest that tirms receiving a tender offer have governance structures that are weaker than firms that voluntarily refocus. Another interpretation is that the interaction between weak governance JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

456

RICHARD A. JOHNSON

and free cash flows makes the firm a more viable target. Chatterjee and Kosnik (1995) also examine firms that received a tender offer. As discussed above, they find that firms that restructured after receiving a tender offer exhibited weaker governance than firms that chose not to restructure. Path 3: Strategy to Downscoping. I have organized the following discussion of strategic antecedents into three sub-sections: firm diversification strategy, financial strategy and competitive issues, and the strategic rationale or goal for the refocusing. One of the major goals top m~agement has for the firm is growth. This may involve increases in the size of business units, but in the 1960s and 1970s this was accomplished to a large extent by diversification (Walsh & Kosnik, 1993). In fact, Jensen (1986) argued that managers have over-invested in diversification. In the 1980s the optimal level of diversification decreased due to the factors described in the environment section. Both Hoskisson, Hitt and Hill (1991) and Ravenscraft and Scherer (1987) argue that excessive diversi~cation may create control loss and misallocation of corporate resources. Over-diversification may lead to inefficiencies and subsequent performance loss (Hoskisson & Turk, 1990; Markides, 1992b). Berger and Ofek (1995) report an average value loss of 13- 15 percent between 1986 and 1991 for unrelated diversifiers. This loss was somewhat mitigated when diversification was within related industries. In addition, Porter (1987) and Ravenscraft and Scherer (1987) found that a large proportion of the units acquired in conglomerate mergers were sold off. Hill and Hoskisson (1987) argue that related-constrained firms focusing on synergistic economies require different control systems than firms focusing on financial economies such as unrelated diversified firms. They further suggest that these different control systems are incompatible and may contribute to managerial control loss and inef~ciencies. Several studies have examined the relationship between the level of diversification and corporate refocusing. For example, Markides (1992b, 1995) found that firms with very high levels of diversification relative to industry counterparts were more likely to refocus than firms with less diversification. Similarly, Smart and Hitt (1996) found that high levels of diversified scope were more likely to lead to refocusing as opposed to financial rest~cturing (LBOs). Hoskisson et al. (1994) found that refocusing firms on average exhibited higher levels of diversified scope than the industry average and that these high levels were positively related to divestment intensity (number of units sold, percentage of assets divested, and the time spent refocusing). Overall, results indicate that high levels of diversification result in inefficiencies that may lead to declines in performance and refocusing. Hoskisson and Johnson (1992) argued that many of the ref~using firms experienced control system inefficiencies due to a mixture of strategic and financial controls. They found that the majority of firms in their refocusing sample were related-linked (firms that include components of related and unrelated diversification). Most of these firms either downscoped to a related-constrained strategy emphasizing synergistic economies or divested related units to pursue an unrelated diversified strategy. Bergh and Lawless (1992) also found that related-linked firms divest more businesses but do so only when uncertainty is high. Johnson et al. (1993) found that firms may pursue at least two different strategies when refocusing; some firms may only divest units while others continue to make acquisitions JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

REFOCUSING

457

during refocusing. Firms that continue to make acquisitions along with divestitures were found to be more highly diversified and exhibit higher performance. These findings suggest that firm governance is stronger in firms that continue to acquire and divest. Bergh (1995) found some support for the moderating effect of governance in that the effect between firm strategy and the type and size of units sold is moderated by ownership patterns. Firm financial strategy and competitiveness issues (debt, R&D, slack, market share) are oftentimes linked to diversi~cation strategy. For example, Baysinger and Hoskisson (1989) found that diversification was positively related to debt levels and that debt and diversified scope have a negative impact on R&D intensity. Hitt, Hoskisson and Ireland (1990) and Hoskisson and Hitt (1988) argue that as diversification increases, managers cannot process all the information necessary to use strategic controls and instead emphasize financial controls based on shortterm results such as ROI. They further argue that emphasis on financial controls leads to managerial risk aversion (in the form of lower R&D intensity). Markides (1992b) found that firms with high levels of R&D expenditures in their core business were less likely to refocus. In addition, a firm was more likely to refocus if the core business was attractive (i.e., higher performance, size, advertising intensity, and current ratio). Similarly, Liebeskind and Opler (1993) found that firms with low levels of R&D and slack were more prone to refocusing during the 1980s. Ravenscraft and Scherer (1991) report that sell-offs were more likely the lower the line’s market share, the lower the R&D/sales ratio, and in the aftermath of CEO change. Despite the fact that Ravenscraft and Scherer focused on single divestitures, their results compare favorably with those reported by Markides (1992b) and Liebeskind and Opler (1993). Interestingly, Hoskisson et al. (1994) did not find a significant path between R&D intensity and divestment intensity (although the correlation was significant and in a direction consistent with previous studies). The stronger relationship appeared to be that diversified scope affects R&D negatively, but the main effect is between diversification and divestment intensity. These findings seem inconsistent given the previously mentioned studies. One possible expl~ation may be that other studies have utilized linear regression as opposed to estimating simultaneous equations with covariance modeling. Lastly, Hamilton and Chow (1993) report that divesting firms in New Zealand were larger and faster growing (sales growth) than non-divesting firms. These results seem somewhat inconsistent with a refocusing strategy. One explanation may be that these firms are following a portfolio strategy of divesting poor performers and using the proceeds to acquire new businesses as opposed to a refocusing strategy; thus, the firm is continuously acquiring businesses to maintain growth and divesting units that do not meet stringent performance requirements. The strategic rationale for refocusing varies considerably across studies. In general, rationales fit into two categories: The refocusing category (i.e., fit, emphasize core operations, relatedness) and financial goals (i.e., growth, cash flows, expansion). Duhaime and Grant (1984) report that managers cited a lack of fit with other units as one of the primary reasons to divest. Similarly, the firms Hoskisson and Johnson (1992) examined announced a refocusing and a change in strategy in the Wall Street JournaZ. Markides (1992b) reported that managers found the JOURNAL

OF ~ANAG~ME~.

VOL. 22, NO. 3.1996

458

RICHARD A. JOHNSON

current firm to be unmanageable or that they were choosing to emphasize core operations. Lastly, Singh and Chang (1996) found that some business turnover is a consequence of exploration. Using longitudinal data from 1981-1989 they report that 43 percent of entries into new markets through acquisition and internal development were divested prior to the end of their study in 1989. Divested units exhibited both lower relatedness and growth than retained units. The other group, classified as financial goals, seems to emphasize short-term performance or fund raising to pursue other objectives, such as acquisitions. For example, Hamilton and Chow (1993) report that managers planned to use the proceeds from the sale to reinvest in core operations as well as future acquisitions. Lang, Poulsen and Stulz (1995) found that managers of firms in their sample sold assets when doing so provided the cheapest funds to pursue objectives. Interestingly, Ito (1995) provides evidence that firms use spin-offs to achieve growth (in the unit spun-off). Ito argues that Japanese firms use spin-offs to balance transaction costs associated with managing a diverse set of businesses and to generate growth based on core competencies. Path 4: Performance to Downscoping. Firm performance represents one of the first antecedents researchers examine as a rationale for sell-offs or downscoping. In addition to being one of the first antecedents investigated, Ravenscraft and Scherer (1991) found that business unit performance was the strongest predictor of whether a given unit would be divested. Studies examining performance as an antecedent can be classified into one of two categories: Those examining single divestitures and those examining a program of divestitures. In general, studies examining single divestitures focus on firms with one event (a sell-off) or the first sell-off in a series. Part of the rationale for doing this is to avoid the problem of using daily returns to estimate historical market averages when multiple divestiture announcements occur in a short period of time. Single divestiture studies are unanimous in their finding that firm performance is poor prior to divestiture (e.g., Alexander, Benson & Kampmeyer, 1984; Jain, 1985). Brown, James and Mooradian (1994) examined firms that had either defaulted or anticipated default and found that these firms divest business units to improve overall firm performance and to generate funds. Hamilton and Chow’s (1993) results suggest that divestiture was motivated by the firm’s need to convert unattractive assets into cash to strengthen the balance sheet. Both of these studies suggest that these firms are selling “mistakes” or units that will contribute the most cash to the firm. Duhaime and Grant (1984) conducted interviews with executives from 40 diversified firms and found that the business unit’s strength (performance relative to other units) and the parent firm’s financial position (relative to industry averages) influence divestiture. Findings reported by Ravenscraft and Scherer (1991) using a hazard-function model corroborate Duhaime and Grant’s findings. Montgomery and Thomas (1988) found that divested units tend to be weak performers and that the parent firm exhibited significantly lower levels of performance than matched control firms. In summary, poor business unit or firm performance is positively associated with divestiture. The only exception to the above statement involves spin-offs. Miles and Rosenfeld (1983) found that spin-offs took place after a period of generally posiJOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE REFOCUSING

459

tive abnormal returns. This raises an interesting question regarding the differences between sell-offs and spin-offs. In addition to the obvious ownership differences, spin-offs appear to be used when performance is generally superior, while sell-offs take place when performance is poor. Ito (1995) suggests that firms use spin-offs for proactive reasons as opposed to reactive ones. Ito presents evidence that Japanese firms commonly use spin-offs to achieve growth and to reduce transaction costs associated with managing a large diversified firm. Downscoping involves the divestiture of multiple units, which generally leads to the emphasis of the firm’s original core business or a “new core.” The performance rationale for refocusing is essentially the same as that for single divestitures except that the goal is a change in firm strategy (Hoskisson & Johnson, 1992; Markides, 1992a, 1992b). Smart and Hitt (1996) found that the antecedent conditions leading to asset restructuring (downscoping) were different from those leading to financial restructuring (LBOs). Their findings suggest that agency costs may be a better predictor of asset restructuring than financial restructuring. Using a logistic regression procedure, they found that high levels of performance lead to LBOs (implying that low performance leads to asset restructuring). Kose, Lang and Netter (1992) used field interviews to examine 46 voluntarily restructuring firms and found that managers blame various exogenous factors for poor performance and the need to restructure. Unlike firms in single divestiture studies, those firms who engage in sell-offs may not do so because business unit performance is poor. Singh and Chang (1996) report that business turnover may be prompted by poor performance, but that this may relate more to lower growth of the unit as opposed to financial ratios. They found that business units with lower growth were more likely to be divested. They further report that some business turnover is a result of exploratory moves into new markets that did not live up to expectations or did not fit the current strategy. In this scenario, firms may divest a business unit that exhibits good financial ratios but no longer fits with firm strategy. Johnson et al. (1993) found the average firm’s ROA was below industry average ROA in the year prior to restructuring. However, fully one-third of the firms in their sample were performing at or above industry levels before initiating refocusing. In addition, Johnson and colleagues found that average market performance (Jensen’s alpha) was negative pre-refocusing, but that 38 percent of the firms in their sample exhibited positive returns in the year pre-refocusing. Hoskisson and Johnson (1992) report that average firm ROA was below industry averages pre-refocusing and that firms following a related-linked strategy exhibited the worst pre-refocusing performance. Liebeskind and Opler (1993) found that firms with higher industry adjusted Tobin’s q ratios were less likely to divest and more likely to add assets to core and peripheral business areas. Their findings are consistent with Hoskisson and Johnson (1992) and Johnson et al. (1993), who report that some firms make acquisitions during refocusing and that these firms exhibited higher performance than firms that are only divesting units. Chang (1996) reports that relative performance (weighted measure of ROA) is strongly related to divestiture but that large firms tend not to divest as often as smaller firms when faced with the same gap between current and desired perforJOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

460

RICHARD A. JOHNSON

mance. Chang suggests that large firms may have greater slack (cash flows) that insulate them from pressures to divest more than smaller firms. Lastly, Hoskisson et al. (1994) present evidence to suggest that both low accounting (industry adjusted ROA, ROE, and ROS) and market performance (Jensen’s alpha, Treynor, and Shapre measures) were positively related to both the number of units divested and the percentage of assets divested (also termed divestment intensity). They also report that the relationship between accounting performance and divestment intensity is mediated by market performance. Taken together, results between single divestiture and multiple divestiture studies suggest that poor firm performance (or business unit performance) represents a strong predictor of divestiture. Some differences are present, however. Single divestitures report that poor business unit performance is the best predictor of sell-off (e.g., Ravenscraft & Scherer, 1991). Very few studies (see Duhaime & Grant, 1984; Ravenscraft & Scherer, 1991 for an exception) focus on the “fit” between the unit divested and the parent. Studies examining corporate refocusing find multiple factors that lead to refocusing, some of which are stronger than firm performance. Secondly, the structural equation model by Hoskisson et al. (1994) suggests that firm performance moderates and mediates many of the antecedents. This suggests that focusing on firm performance as the primary criterion for selloff may serve to inflate the effect of firm performance on the decision to divest. Thirdly, many refocusing firms are outperfotming their industry before refocusing. This suggests that other factors in addition to performance are driving a firm’s decision to refocus. Path 5: Financial Restructuring to Downscoping. The final antecedent, financial restructuring, involves a broad set of activities. The only studies linking financial restructuring to downscoping involve LBOs and MBOs. For definitional purposes, LBOs are assumed to be one of three types: (1) management buyouts (MBO), (2) employee buyouts (EBO), and (3) an LB0 in which another firm helps take the firm private. Although ESOPs, recapitalizations, and stock repurchases undoubtedly occur during downscoping, no research suggests causality in either direction. For example, Schipper and Smith (1986) found that equity carve-outs often occur in association with other types of restructuring. Similarly, Gibbs (1993) has found a positive and significant correlation between stock repurchases and debt recapitalizations and portfolio restructuring. Jensen (1986) argues that LB0 firms provide more intense incentives for managers to increase a firm’s value than do public corporations. Managers in public firms generally do not own significant equity in the firm and are compensated based on the size of the firm rather than market value (Jensen & Murphy, 1990; Murphy, 1985). Managers, therefore, have the incentive to increase firm diversification to decrease their employment risk (Jensen, 1986). As a result, Jensen argues, managers have the incentive to invest in unprofitable ventures that may reduce firm value. The incentive intensity hypothesis tested by Liebeskind, Wiersema and Hansen (1992) suggests that LB0 firms are able to address these shortcomings due to high levels of leverage (decreases free cash flow) and the presence of a few owners with substantial equity stakes (Kaplan, 1989). JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE REFOCUSING

461

As a result both Liebeskind, Wiersema and Hansen (1992) and Wiersema and Liebeskind (1995) argue that managers of post-LB0 firms have the incentive to downscope the firm to increase efficiency. Results from both papers find that LB0 firms downsized (laid off employees) to a greater extent than matched control firms, but did not refocus to any great extent. Liebeskind et al. (1992) present evidence to suggest that refocusing was no more intense in LB0 firms than in their matched control firms. In contrast to this, Wiersema and Liebeskind (1995) suggest that LB0 firms do refocus to a greater extent than control firms. It is interesting to note that LB0 firms did decrease the absolute number of different lines of business, but diversified scope (total and unrelated diversification) did not change significantly. Although the divested lines of business may have been small (thereby minimizing the effect on diversified scope), the firm may have engaged in across-the-board sell-offs of related and unrelated business units. These results suggest that LB0 firms may not engage in significant refocusing, at least not to the extent of their publicly traded downscoping counterparts. For example, Hoskisson and Johnson (1992) provide evidence of significant decreases in diversified scope between pre- and post-restructuring phases, while Hoskisson et al. (1994) found that publicly traded downscoping firms divested an average of 22 percent of firm assets during downscoping. In contrast to the findings presented by Liebeskind et al. (1992) and Wiersema and Liebeskind (1995), Seth and Easterwood (1993) found that MB0 firms that used a pre-buyout strategy of unrelated or conglomerate diversification engaged in divestitures and focused on more related businesses. These conflicting results suggest that there is some difference between MBOs and LBOs when it comes to post-buyout strategy. More importantly, the increases in sales Wiersema and Liebeskind (1995) reported may represent short-term gains. Both Kaplan (1989) and Long and Ravenscraft (1993) found evidence of significant decreases in capital expenditures in the post-buyout phase. Long and Ravenscraft also document a 40 percent decrease in R&D expenditures in the post-buyout period. These findings suggest that there is a difference between LBOs and MBOs in that managers of MB0 firms tend to refocus on related businesses while LB0 firms seem to generate gains through downsizing and cost retrenchment. MBOs and EBOs may provide greater incentives for change than LBOs, in which the firm was taken private by another firm (e.g., KKR). The previous discussion suggests that combining all three forms of LB0 into one category may serve to obscure the relationships. Outcomes from Downscoping The outcomes of downscoping are equally as important as the antecedent conditions that brought about downscoping itself. I have organized studies examining outcomes into three sections: effect on firm strategy (diversification, innovativeness, financial strategy), effect on employees (morale, turnover, layoffs, productivity), and effect on firm performance. Table 2 presents the outcomes of downscoping. Each of the outcomes presented will be examined, in turn, as presented in Figure 1 and Table 2. In Table 2, the articles are presented by path category. Each entry lists the author and year, type of data used, and the study’s findings. JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

E

E, P

General Dynamics engaged in a restructuring program in 1991 that involved downsizing and sell-offs. The action was initiated due to fundamental changes in the industry and excess capacity. GD determined its core competency was in heavy-weight defense platforms and sold-off units not related to its core. In addition, GD laid-off 18% of their workforce. This study illustrates the importance of managerial incentives and the benefits of voluntary restructuring on firm strategy.

Brown, James & Mooradian (1994)

Case study examining the voluntary restructuring at General Dynamics starting in 1991.

Findings or Implications

(Downscoping)

Dial & Murphy (1995)

Refocusing

Paper presents a framework which suggests that firms learn from past entry experience, and exit and approach the next entry in a more focused and direct manner over time. Study shows that the applicability of the firm’s knowledge base plays a role in predicting which businesses a firm enters and exits. Intensive searches (related diversification) require exploitation of existing knowledge bases and contribute more to profitability than extensive searches (unrelated acquisitions of moves). Findings suggest that after a firm refocuses on a core business, it primarily makes related acquisitions in which the existing knowledge and skills may be transferred.

of Corporate

Longitudinal ( 198 l- 1989) database on entry and exit activities of publicly traded manufacturing firms in the U.S.

Data

the Outcomes

Chang (1996)

Examining

Results suggest that when proceeds from the sale of assets are paid out to creditors (to repay debt), the market responds negatively (-1.63% abnormal returns). If the proceeds are retained by the firm, then the market responds positively (1.87% abnormal returns). Two day returns for bankrupt fiis were statistically significant and negative (-2.33%) regardless of rationale. Repayment of debt was negatively related to CEO turnover (34% of CEOs were replaced).

Studies

62 asset sales by 49 financially distressed firms 1979-1988. Financially distressed implies that firms engaged in asset sales to remedy or avoid default.

Path 6: Downscoping to Firm Strategy Study Other Outcomes

Table 2.

P

189 firms that voluntary res~ctured between 198 I - 1987. Firms had to divest at least 10% of their assets and ~nounce the refocusing to the investment ~o~unity (e.g., WSY),

Survey and archival data from 250 firms that voluntarily restructured through asset restNctu~ng between 1985-1991.

Hitt, Hoskisson, Johnson & Moesel (fo~hcom~ng)

Hoskisson & Johnson (1992)

Sampie of 686 4-digit industries and 64 Z-digit industry groups between 19811989. Sample contains a mix of all industries and uses Trinet data.

Hatfield, Liebeskind & Opler (1996)

(Continued}

Results suggest that resecting activity tended to focus firms on either related or unrelated strategies. in addition, refocusing had a positive effect on firm R&D intensity, as did reductions in diversified scope (Le., fums adopting related-constrained or dominant firm s~ategies). Firms opting unrelated strategies reduced R&D intensity. On average, frms exhibited significant accounting performance improvement in the 2 years ~st-s~c~~ng.

Paper tests an inte~at~ theoretical model of the direct effects of restructuring activity on internal and external innovation as well as indirect effects dough corporate control systems. Results indicate that acquisition and divestiture activity lead to a reduction in strategic control use and an increase in financial controls. This reduces internal innovation although acquisition activity leads to greater external i~ovation. Analysis on a subset of firms that completed restructuring suggests firms reimpiement strategic controls and increase internal innovation after restructuring is completed.

Paper examines the question of whether asset restructuring resulted in increased industry s~ci~ization. Results suggest that industry specialization was not effected by sell-offs of establishments during the 1980s. In fact, industry specialization increased slightly. Plant closures were found to be an important determinant of increases in industry s~ializat~on. These resuits suggest that many firms reduced their industry involvement by closing down plants, rather than selling them off (possibly because excess industry capacity resulted in few buyers). Service industry membership was also a significant dete~in~t of the decrease in aggregate industry specialization, possibly due to less competitive pressure to specialize compared to rn~ufac~~ng industries,

E

Other Outcomes

See above

S

Dial &Murphy (1995)

See above

597 survey respondents from 300 firms in a small telecommunications retail store chain, The chain had recently closed many of its outlets.

S, P

Brockner et al. (1993)

Brown, James & Mooridian ( 1994)

Paper examines layoffs during res~ctu~ng and the effect they have on surviving employees. Findings suggest that survivors are concerned about possible future layoffs. Survivors low in trait selfesteem were more likely than their high self-esteem counterparts to: feel worried, and translate their feelings of worry into increased work motivation. Other combinations were not significant (i.e., high selfesteem and low probability of future layoffs did not lead to greater work motivation).

Findings indicate that median industry concentration increased slightly between 1981-1989. Results also indicate that sell-offs are negatively associated with changes in industry concentration. This evidence is inconsistent with the argument that mergers and sell-offs led to increases in industry concen~ation in the 1980s.

Paper examines restructuring responses to performance decline as well as the outcomes of restructuring activity. 63% engaged in asset sales, 43% reduced employment, 39% reduced debt, and 28% emphasized their core business. 50% of the firms replaced senior management. On average, firms retrench quickly and increase focus, cut at least 5% of their workforce, reduce debt by -8%, and immediately cut R&D as they begin restructuring.

Sample of 46 firms that restructured due to declining performance in the 1980s.

Sample of 695 4-digit industries between 198 1- 1989 using Trinet data. Sample includes a mix of manufacturing and service industries.

Findings or Implications

Continued

Data

Path 7: Downscoping to Employee Effects

Liebeskind, Opler & Hatfield (1996)

Kose, Lang & Netter (1992)

Study

Path 6: Downscoping to Firm Strategy

Table 2.

E 2 $ w ?

S

This paper argues that the market evaluates insider trading activity and ownership structure when characterizing sell-offs as favorable or unfavorable for investors. Results support the assertion in that there is a significant ~nouncement effect of 5.26% for closely held firms with insider net-buy activity versus the nonsignificant .7.5% return for widely held firms displaying net-sell activity.

Sample of 64 voluntary sell-offs between 1975 and 1982.

Hirschey & Zaima (1989)

(Continued)

Sellers earn an average 3.55% CAR over the 9 days preceeding the divestiture announcement. Results further indicate that the financial status and size of the seller moderate returns. The stronger the financial status of the seller, the larger the positive excess returns. In addition, larger divestitures exhibit larger positive excess returns.

Sample of 58 divestitures announced between 1979-1981.

Alexander, Benson & Kampmeyer (1984)

Hearth & Zaima (1984)

Paper examines managerial attitudes during res~ctu~ng. Pour types of turbulence were identified: Incremental negative turbulence (layoffs, re-organizations), financial restructuring, growth through acquisitions, and organizational breakup (sell-offs, spin-offs, takeovers). Organization breakup, growth, and financial restructuring were positively associated with career loyalty, while incremental negative turbulence was negatively related to job security. Results suggest that managers have recognized that because of turbulence, their job security is threatened and that they should be prepared to change organizations. These managers appear to be more loyal to their careers and are building personal survival skills such as portable skills and marketable experiences.

Positive abnormal returns are found to occur on the announcement date of voluntary divestitures. However, it was found that such selloffs generally occur after a period of abnormally negative returns.

Sample comprised 17 Fortune 500 corporations in 8 industries. Survey data from 49 SBU managers were used to assess turbulence while responses from 679 middle managers were used to assess attitudes.

See above

Sample of 39 single divestitures (firms with multiple divestitures were deleted) between 1964-1973.

A. Event Studies

Path 8: Downscoping to Performance

Reilly, Brett & Stroh (1993)

Kose, Lang & Netter (1992)

Paper investigates the valuation consequences of voluntary proposals to sell part or all of a corporation’s assets. For partial sell-offs, successful sellers and buyers reap significant abnormal returns of 1.66% and .83%, respectively. Unsuccessful sellers realize gains at the bid announcement of 1.41% that are lost at the offer termination. Proposals to liquidate the firm are associated with signi~c~t abnormal returns of 12.24%. Results indicate that both sellers and buyers earn significant positive excess returns upon the announcement of voluntary sell-offs. The 2day window surrounding the announcement day yielded CARS of .6%. In addition, sellers earn higher returns than buyers. Paper examines differences in announcement day effects among firms engaged in voluntary sell-offs. Not all divestitures are accompanied by positive price movements. Disclosure of the price results in significant, positive returns to the seller. If the price is not reported, then returns are not statistically different from zero. In addition, a positive relationship is found between the size of the selloff and the announcement day return.

Data was composed of three samples: 55 sellers and 5 1 bidders from completed divestitures between 19631978,59 unsuccessful sellers and 54 unsuccessful bidders from 1971-1981, and 49 liquidations from 1966 - 198 1.

Sample of over 1000 voluntary sell-offs between 1976 and 1978.

215 firms that announced in voluntary sell-offs between 1970-1979.

Hite, Owers & Rogers (1987)

Jain (1985)

Klein (1986)

Findings or ~m~~i~ations Positive abnormal returns of 3.3% are generated on day -1 and day 0. Shareholder wealth increases if the spin-offs have strategic value (i.e., facilitate mergers or improve manageability of the firm). Firms responding to legal or regulatory issues exhibit negative abnormal returns.

Data

123 spin-offs made by 116 firms between 1963 and 1981.

Other Outcomes

Continued

Hite & Owers (1983)

study

Path 8: Downscoping to Performance

Table 2.

E!

Z!

P 5

2 $ U

E

CORPORATE

REFOCUSING

JOURNAL

OF MANAGEMENT,

VOL. 2’2, NO. 3, t996

Study compares the effects of equity carve-outs, spin-offs and selloffs on industry rivals. Share price reactions for industry rivals are negative in response to equity carve-outs (-1.11%). Rival returns are positive for spin-offs (0.6%) and normal for sell-offs over the Z-day announcement window. In addition, 38 announcements of refocusing yielded a 2-day CAR of 3.22%. Rival firms earned 0.55% over the same period suggesting that refocusing announcements lead to a positive information effect for the future prospects of the industry. Paper suggests that variance in market responses to sell-offs is due to managers’ decision horizons. If compensation is based on short-term performance, managers may be tempted to sell assets to generate short-term gains. Long-term performance plans extend m~agers’ decision horizons and should be consistent with shareholders’ longterm interests. Results support the hypothesis. The market responds more favorably to sell-offs made by firms with long-term pe~o~ance plans than firms with short-term performance plans.

36 equity carve-outs, 41 spin-offs and 203 sell-offs along with a portfolio of industry rivals between 1980- 199 1.

146 sell-off events occurring between 1974-1982. Compensation data was collected from proxy statements.

Tehranian, Travlos & Waegelein f 1987)

Findings or ~rnp~icat~a~s

Slovin, Sushka & Ferraro ( 1995)

Continued

Results for the full sample find an average return of .92% on day -1 and day 0. Firms whose credit rating was downgraded prior to the sell-off received lower returns to sh~eholders (.37%) as opposed to fiis that hadn’t been downgraded (1.13%). In addition, disclosure of the price when the sale is announced results in significantly greater returns (1.48%) than sellers that did not disclose the price (.31%).

Data

Table 2.

278 matched pairs of sellers and buyers of voluntary sell-offs between 198 l1987.

Other Outcomes

to Petfwmance

Sicherman & Pettway (1992)

Study

Path 8: Rawnscop~ng

Results indicate that divestiture’s effect on fii

performance (ROA) praduct-m~k~t

(Continued)

Paper documents the decrease in divets~~~ scope that occurred during the 1980~~38.1% of the firms had a single segment in 1979, while 55.7% listed single segment in 1988. They also present data indicating that firms that are focus-~nereas~~g expe~eu~e an upward trend in net-of-market we&h, A change of 0.1 in the absolute value of a revenue-based ~e~nd~~ index of focus is associated with a stock return of about 4%. In addition, large focused firms were less hkeiy to be subject to takeover atter~pts than other types of firms.

when

Sample consists of all firms on the ~~~P~STAT Business Segment Tapes that are listed on NYSE and ME between 1978-1989.

buoyance

Comment & Jarrell (1995)

positive effect on firm unce~inty increases.

takes Z-years to be realized. Rivest~tures appear to have a more

Post”sell~off pe~o~~ce of the parent firm is associated negativity with the relatedness of the unit sold. This finding is consistent with a resource-based expectation, in that selling a related business threatens a seller’s source of competitive advantage more than an ume~ated business. These results suggest that the type of unit sold depends on the type of ~onomi~ benefit sought by the parent firm.

Panel of 168 Fortune 500 firms between ~985-19~. Paper ex~nes both acquisitions and divestitures.

Paper examines the effects of layoff announcement of sh~eho~der wealth, as well as layoff ~nouncem~nt context, Results indicate that investors react negatively to layoff announcements which are att~butable to poor performance. Layoffs made in conjugation with restmctu~~g activity are positive, but not s~tist~c~ly different from 0, Returns from layouts classified as related to restm~tu~~g were margiua~~y greater than layoffs due to poor pe~o~~ce.

Sample of sell-offs by 1.12~urt~~e 500 firms between 1986 1990.

measures

194 layoff announ&~meuts between 1979 and 1987. Firms were classified into two categories: layoffs as part of restm~tn~~~ and layoffs due to ~nan~i~ pe~o~an~e=

Bergh (1995)

B. A~ountin~a~ketin~ Bergh (1996)

_ __ __-.-. Worrell, Davidson & Sharma (1991)

8 \D

3 $ -I z e 8 $ 3

CD

9

9 !? .?

5 2, $

8

z

s

3

Kose & Ofek (1995)

321 divestitures reported in Mergerstat Review worth at least $100 million between 1986-1988.

See above

Hoskisson & Johnson (1992)

Sample consists of 815 spin-offs between 1965 and 1988 from 27 industries. 146 events were pure spin-offs.

Data

Findings or Implications

Study finds that asset sales lead to an improvement in operating performance (EBITD/sales and ROA) of the seller’s remaining assets in each of the 3 years following asset sales. Improvement in performance occurs primarily in firms that increase focus. Returns on the announcement date are also greater for focus-increasing divestitures.

During the 198Os, GM reversed its extensive diversification and returned to its traditional core business. Divestiture of business units followed changes in incentives in 1985. The market response to the announcement of the first set of divestitures was an excess return of 12.85%. ROE increased from 16.7% in 1985 to 56.6% at the end of the restructuring in 1989.

Paper examines market reactions to spin-off announcements as well as the performance of the parent and spun-off unit for 3 years after the separation. Results suggest that both the parent and the spun-off unit provide positive abnormal returns for the 3 years post spin-off. Interestingly, both spin-offs and parents are more frequently involved with takeovers than the control group of comparable firms. Fully l/3 of the sample was involved in takeover activity within 3 years of the spin-off. Most takeover activity occurs in years 2 and 3, the years of strongest stock performance. For parent firms, the majority of takeovers occur within the first two years which is when parent stock returns are highest.

Continued

Detailed case history of the voluntary restructuring at General Mills through field interviews.

S

Other Outcomes

Table 2.

Donaldson (1990)

Cusatis, Miles & Woolridge ( 1993)

Study

Path 8: Downscoping to Performance

a z? g z

Performance (industry adjusted ROA) improves post-divestment relative to pre-divestment levels. However, divesting firms’ ROA during the post-divestment is still significantly lower than that of matched control firms.

68 voluntary divestments

Montgomery & Thomas (1988)

S = Strategy, E = Employee Effects, P = Performance.

Paper tests who gains from the spin-off (parent or unit). Results indicate that performance of the unit did not improve post spin-off. In fact, -50% of the spin-offs declined on all three performance measures (ROA, market-to-book ratio, and Jensen’s alpha). Unrelated units experienced more severe performance declines than related units. After 6 years, 2 firms were in bankruptcy, 6 have sustained severe losses, 2 were taken private, and 10 sustained 3 or more years of declines before becoming profitable.

Sample of 5 1 voluntary spin-offs between 1975 and 1986. Firms were tracked 2 years prior to spin-off and 3 years post-spin-off for the unit.

Woo, Willard & Daellenbach ( 1992)

Nore: Other Outcomes:

Paper examines the accounting performance implications of layoffs 1 year and 2 years after the layoffs occurred. Layoffs were categorized into two groups: layoffs associated with restructuring and layoffs not associated with restructuring. Results suggest that the change in performance (ROE and ROS) for firms not making other organizational changes was not significantly different from those making changes (restructuring).

109 firms that announced layoffs in six major newspapers between 1986 and 1989.

Norman ( 1995)

Non-divesting control firms were matched to divesting firms.

Fortune 500firms between 1976-1979.

made by

Findings indicate that refocusing activity has a positive impact on firm performance (ROA & ROE). A breakdown of the sample into early (1981-83). middle (1983-85), and late (1985-87) refocusers yielded somewhat different results. Early refocusers were significantly related to improvements in ROA and ROE. Middle and late refocusers were not associated with profitability improvements. Findings suggest that refocusing’s benefit on profitability may take some time to be realized.

Stratified random sample of 200 firms selected from the Fortune 500.Thestudy period was 1981-1987.

Markides ( 1995)

412

RICHARD A. JOHNSON

Path 6: Downscoping to Firm Strategy. One of the most commonly stated goals of refocusing is to change firm strategy. This change may serve to improve the fit between firm strategy and the environment, restore competitiveness, and improve efficiency in resource allocation. This section deals with studies that examine firms in the process of restructuring, as well as those that have completed the refocusing effort. High levels of diversification have been linked to lower levels of R&D intensity. If one of the goals of refocusing is to reduce diversified scope, then firms in R&D-intensive industries might be expected to reimplement strategic controls to increase managerial risk taking through R&D expenditures (Hoskisson & Johnson, 1992). Hitt, Hoskisson, Johnson and Moesel(1996) examined the effect of participation in the market for corporate control (acquisitions and divestitures) and found that both acquisition and divestiture intensity lead to an emphasis on financial controls and a reduction in strategic control usage due to information-processing problems. Using structural equation modeling, the authors found that an emphasis on financial controls has a negative impact on internal innovation (R&D and new product announcements). Strategic controls, the study found, increase internal innovation. Firms actively altering their portfolio were more likely to acquire new technology and products as opposed to developing them internally. Kose, Lang and Netter (1992) found that the majority of firms retrenched quickly upon initiating restructuring; 39 percent reduced debt by about 8 percent and immediately cut R&D as they began restructuring. Cuts in R&D were probably linked to tight financial controls implemented to aid in cost retrenchment (Hambrick & &hector, 1983; Robbins & Pearce, 1992). Brown et al. (1994) examined firms that had defaulted or were close to defaulting and found that firm creditors exercised considerable control over the firm. When the firm used proceeds from asset sales to repay debt, CEOs were more likely to retain their positions. Hoskisson and Johnson (1992) found that once firms completed restructuring they have moved away from the related-linked strategy to either relatedconstrained or unrelated strategies that emphasize either strategic or financial controls (but not both). The majority of firms downscoped and focused on related businesses. Downscoping was positively related to R&D intensity, while divestiture of related units and an emphasis on unrelated units was negatively related to R&D intensity. These results suggest that downscoping firms solved their overdiversification problem and reimplemented strategic controls. Hitt et al. (1996) provide support for this assertion using a subset of firms that had completed refocusing. Hitt and colleagues found that once firms completed restructuring they reimplemented strategic control and increased R&D intensity. Similarly, Chang (1996) found that firms that had completed downscoping may make acquisitions, but that these additions are more related and allow existing knowledge and skills to be transferred. The previous discussion is somewhat limited in that firms that engage in acquisitions and divestitures (portfolio restructurers) may not follow the same pattern. Hatfield, Liebeskind and Opler (1996) and Liebeskind, Opler and Hatfield (1996) examined the effect of refocusing on industry specialization and concentration, respectively. Hatfield et al. (1996) reports that industry specialization was not JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE REFOCUSING

473

affected by refocusing activity during the 1980s; however, plant closures were an important determinant of increases in industry specialization. Similarly, Liebeskind et al. (fo~hco~ng) report that median industry concen~ation increased slightly during the 1980s and that sell-offs were negatively associated with changes in industry concentration. It has been widely argued that one of the goals of refocusing is to produce a population of industry-specialized firms in response to global competition (Jensen, 1991). These two studies suggest that this goal has not been fulfilled. Path 7: Downscoping to Employee Effects. The effect of downscoping on firm employees is one of the least examined aspects of restructuring. Only four of the empirical studies reviewed here examine this issue. Several theoretical pieces have suggested that restructuring may have severe consequences for employees, both survivors and non-survivors. The popular business press has been flooded with examples of mass layoffs made in conjunction with asset sell-offs. In fact, Kose et al. (1992) found that 43 percent of refocusing firms cut employees by 5 percent and 50 percent replaced some of senior management. Brown et al. (1994) report that 34 percent of CEOs were replaced by firms in default or near default when they initiated refocusing. Johnson, Hoskisson and Margulies (1990) argue that “psychological shock’ associated with fear, lower morale, higher level of turnover, and self-protectionism may result in a period of post-restructuring drift. Similarly, Brockner, Davy and Carter (1988) argue that survivors often experience severe guilt, insecurity and distress. Hitt and Keats (1992) suggest that the goal of restructuring is to enhance competitive advantage, but that the outcome may be degenerative and dysfunctional. Brockner, Grover, O’Malley, Reed and Glynn (1993) found that survivors low in trait self-esteem coupled with the threat of future layoffs were more likely to feel worried and translate their feelings of worry into increased work motivation. This increased motivation may lead to self-protectionism and a withdrawal from group and team activities (Johnson et al., 1990). Reilly, Brett and Stroh (1993) examined managerial attitudes during restructuring. Organizational breakup (selloffs) were positively associated with career loyalty and negatively associated with job security. Their results suggest that managers recognize the possibility of changing organizations and respond by increasing loyalty to their careers as opposed to the organization. Path 8: Downscoping to Firm Performance. More researchers have examined the relationship between downscoping and firm performance than any other outcome of restmctu~ng. The studies presented in Table 2 have been organized into two categories: event studies and marketiaccounting performance. Previous research has identified two primary modes of downscoping: spinoffs and sell-offs. These two modes appear to be used under different circumstances, however. Miles and Rosenfeld (1983) present evidence to suggest that spin-offs take place after a period of generally positive abnormal returns, while sell-offs are generally preceded by a period of poor pe~o~ance (Alexander et al., 1984; Jain, 1985). Spin-offs generally earn positive abnormal returns between 2.8 and 5.6 percent upon announcement (using a two-day window). These returns appear to be moderated by several factors. For example, Hite and Owers (1983) JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3. 1996

414

RICHARD A. JOHNSON

found that spin-offs undertaken for strategic reasons (to facilitate a merger, increase manageability, or facilitate growth) earn positive abnormal returns, while firms responding to legal or regulatory issues earn negative abnormal returns. In general, spin-offs outperform sell-offs (Rosenfeld, 1984), and the larger the spinoff, the larger the return (Miles & Rosenfeld, 1983). Sell-offs follow many of the patterns identified with spin-offs. Sell-offs generally earn positive abnormal returns (Alexander et al., 1984; Hearth & Zaima, 1984; Hirschey & Zaima, 1989; Hite, Owers & Rogers, 1987; Jain, 1985). As above, several factors may moderate sell-off returns. Montgomery, Thomas and Kamath (1984) found that sell-offs made as part of integrated strategic plans earned positive abnormal returns while routine, non-strategic sell-offs were negatively valued by the market. Both Hearth and Zaima (1984) and Klein (1986) present evidence to suggest that the size of the sell-off is positively related to firm returns. Hirschey and Zaima (1989) report that insider trading activity pre-sell-off may affect firm returns. Management’s net-buy activity leads to positive abnormal returns, while net-sell activity results in nonsignificant returns. Both Klein (1986) and Sicherman and Pettway (1992) found that disclosure of the price resulted in significant, positive abnormal returns to the seller, while non-disclosure of the price results in non-significant returns. In addition, Sicherman and Pettway found that firms whose credit ratings were downgraded before the announcement, earned lower returns than firms that hadn’t been downgraded. In a similar study, Hearth and Zaima (1984) report that the stronger the financial position of the seller, the larger the positive excess returns. Lang, Poulsen and Stulz (1995) observed that firms who announce they will pay out the proceeds earn positive and significant returns, while firms that retain the proceeds earn returns indistinguishable from zero. Proceeds from the sale may be discounted because of the agency costs of managerial discretion. Lastly, Slovin, Sushka and Ferraro (1995) examined the effect of equity carve-out, spin-off, and sell-off announcements on the market returns of industry rivals. Rivals of the carved-out subsidiaries lost an average of 1.11 percent of their market value over the 2-day announcement window. Rivals earned significant positive returns upon the announcement of a spin-off within their industry and earned normal returns upon the announcement of a sell-off. The positive return earned by rivals in industries where spin-offs are announced may indicate a favorable signal of industry value. Interestingly, sell-offs do not appear to generate the same favorable prospects for the industry. Three papers have examined market responses to announcements of downscoping programs. Markides (1992a) examined returns to firms that announced a refocusing move in the Wall Street Journal. Markides reports that firms earned positive and significant returns of 1.73 percent during the two days surrounding the announcement. Donaldson (1990) found that General Mills earned a positive abnormal return of 12.85 percent upon announcement of the first set of divestitures. Slovin et al. (1995) found that firms announcing a refocusing earned a 2-day CAR of 3.22 percent, while industry rivals earned returns of 0.55 percent, suggesting that announcements of refocusing lead to a positive information effect for the future prospects of the industry. JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE REFOCUSING

475

In addition to studies examining spun-off units, some research has examined market responses to downsizing (layoffs) announcements while the firm is downscoping. Worrell, Davidson and Sharma (1991) investigate the effect of downsizing announcements (layoffs) on shareholder wealth in two contexts: actively restructuring and non-restructuring. They report that the market responds negatively to announcements that are attributed to poor performance. Layoffs made in conjunction with restructuring activity are positive but not statistically different from zero. Returns to firms announcing layoffs and restructuring are significantly higher than firms announcing layoffs due to poor performance. Norman (1995) examined the effect of layoffs on ROE and ROS one to two years after the announcement and found no significant difference between firms that were restructuring and announced layoffs and those that just announced layoffs. These findings contrast somewhat with the findings of Worrell et al. (1991), who found significant differences upon announcement. These results may suggest that the restructuring firms may not have completed their programs (thus, performance has not improved) or that these firms have not had time to realize performance improvements (e.g., Bergh, 1996; Markides, 1995) due to post-restructuring drift or cultural problems (Johnson et al., 1990). It is also possible that layoffs represent a form of short-term cost retrenchment and may have little effect on overall firm performance. Within the past eight years, researchers have begun to examine the longerterm performance of firms that have engaged in downscoping. In general, these studies examine performance one to three years after restructuring. Montgomery and Thomas (1988) have examined single divestitures and report that industryadjusted ROA improved post-divestment relative to pre-divestment levels, but that the post-divestment performance was significantly lower than matched non-divesting firms over the same period. Comment and Jarrell(1995) examined the population of firms on the COMPUSTAT tapes and found that firms that refocused during the 1980s experienced an upward trend in net-of-market wealth, while firms that decreased focus experienced a decline in net-of-market wealth. Similarly, Kose and Ofek (1995) report that EBITD/sales and ROA improved for each of the three years following asset sales. Hoskisson and Johnson (1992) examined firms that announced a refocusing in the Wall Street .h.u-ml and found that industry-adjusted ROA was significantly higher in the post-refocusing, versus the prerefocusing, period. Recent research, however, has found some variance in these observations. For example, Markides (1995) found that ROA and ROE improved, but that this improvement is due to firms that refocused early in the 1980s (i.e., 1981-1983). Middle (1983-1985) and late refocusers (1985-1987) did not exhibit performance improvements. Markides’ results suggest that it may take time for performance improvements to be realized. Another possibility is that the firms that had the most to gain from refocusing initiated activity in the early 1980s as soon as their predicament became apparent. Using panel data between 1985-1990, Bergh (1996) found that it may take up to two years post-sell-off before performance improvements are realized. In addition, Bergh (1996) reported that divestitures JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3, 1996

RICHARD A. JOHNSON

476

have a more positive effect on firm performance when product-market uncertainty increases. Several studies have examined the relationship between the type of unit sold and performance, as well as the performance of the unit after it was spun-off. Bergh (1995) found that post-sell-off performance is associated negatively with the relatedness of the unit sold. Bergh argued that this is consistent with a resourcebased view in that selling a related business may threaten a seller’s source of competitive advantage more than the sale of unrelated units. Although Bergh’s findings suggest that some of the lack of findings regarding performance may be due to firms’ selling related units, it is very unlikely that this explains why firms in the late 1980s have not shown improvement. Three studies investigated the performance of units that were spun off by the parent firm during refocusing. Woo, Willard and Daellenbach (1992) examined the ~st-spin-off pe~o~ance of the unit as opposed to the parent. They found that post-spin-off performance did not improve on average. In fact, they found that roughly 50 percent of the units declined on all three performance measures (ROA, market-to-book ratio, and Jensen’s alpha). In addition, results suggest that spin-offs of unrelated units experienced more severe performance declines than related spin-offs. These findings contrast with those reported by Cusatis et al. (1993). Cusatis et al. (1993) report that both the parent and the spin-off on average provide positive abnormal returns for the first three years post-spin-off. Interestingly, both the spin-offs and the parents were more frequently involved with takeovers than a control group of comparable firms. Most takeover activity took place between year 2 and 3, the years of strongest stock performance. These findings are consistent with Walsh and Kosnik’s (1993) finding that corporate raiders do not always follow the standard agency argument concerning the disciplinary role of the market for corporate control. A comparison of the findings between Cusatis et al. (1993) and Woo et al. (1992) suggests that many spin-offs do not perform well post-spin-off and that these units may be subject to takeover. An alternative explanation may be that the abnormal returns earned by spun-off units may be due to market anticipation of a subsequent takeover (Cusatis et al., 1993). Seward and Walsh (1996) examined 78 voluntary spin-offs and reported a 2-day CAR of 2.6 percent around the announcement date. However, the primary focus of their study was on the governance arrangements within the recently spun-off unit and their relationship to the market’s reaction to the spin-off announcement. Seward and Walsh report that the new govemance ~angements can be considered ex-ante efficient, but they have little effect on the positive market returns associated with spin-off announcements.

Future Research and Related Issues A number of different antecedents and outcomes are associated with corporate refocusing. Undoubtedly, other factors may lead to refocusing, and many unanswered questions remain. While the area of corporate restructuring shows promise, it is also a complex and problematic area in which to conduct research. JOURNAL OF MANAGEMENT,

VOL. 22, NO. Xl996

CORPORATE

REFOCUSING

417

The purpose of this section is to discuss future research directions as well as problems researchers might avoid. Current theory (e.g., Smart & Hitt, 1994) and preliminary evidence (Smart & Hitt, 1996) suggest that financial and asset restructuring have different antecedents. However, Smart and Hitt’s sample contains firms that either engaged in financial or asset restructuring (but not both). While this is an important first step, more research is needed to examine the relationship between modes of restructuring, given that financial and asset restructuring may occur simultaneously or sequentially. Smart and Hitt (1996) also suggest that agency arguments may not be particularly suited to LBOs, etc. More research is needed to determine the efficacy of agency arguments across topic areas. Within the area of refocusing, there appear to be at least two different strategies: portfolio restructurers (firms that are continually restructuring) and true downscoping firms. Research that ties the motives for downscoping with observed outcomes is also necessary. One of the areas that has received little or no attention is that of post-restructuring governance. If corporate governance is weak (Hoskisson et al., 1994; Hoskisson & Turk, 1990) or a failure (Jensen, 1993) in the pre-restructuring period, what changes does a firm make in the post-restructuring period? If a firm does not correct governance inefficiencies or shortcomings, then the process of refocusing may be followed by renewed expansion or continued inefficiencies. Findings presented by Goodstein et al. (1994) suggest we should focus more attention on the demographic characteristics of boards as opposed to simple insider/outsider dichotomies. Similarly, we may best examine ownership concentration by breaking investors into similar groups (e.g., pension funds, mutual funds and banks, blockholders, managers, and outside directors) as opposed to combining them into one category. These investors may not have the same goals for the firm (see Bethel, Liebeskind & Opler, 1995; Hoskisson, Hitt, Johnson & Grossman, 1996; Kochhar & David, 1996). Research is also needed to examine the apparent differences between market responses to downscoping, managerial perceptions of antecedents and changes at the industry level. Theory suggests that restructuring should result in an increase in industry specialization and concentration as firms focus on fewer business segments (Bhagat, Shleifer & Vishny, 1990; Hoskisson & Turk, 1990; Jensen, 1991). Managerial perceptions appear to support the aforementioned antecedents as triggers for downscoping (Kose et al., 1992), but preliminary evidence suggests that specialization has not increased industry wide (Hatfield et al., 1996). However, the market continues to positively value downscoping announcements. Moreover, industry rivals appear to earn positive returns when other firms in their industry announce a refocusing (Slovin et al., 1995). These results suggest that the market perceives that refocusing improves the future outlook of the industry even though many of the aforementioned goals from restructuring have not manifested themselves at the industry level. There is a large volume of research that predicts the effect of organizational changes on firm employees. It would seem beneficial to examine steps and procedures that may minimize the loss of morale, lack of communication, turnover and lack of commitment to the firm. Lack of improvement in post-restructuring may be JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

478

RICHARD A. JOHNSON

partially due to the level of turmoil within the firm. Hence, research investigating the process of restructuring is also needed. The focus of most research in downscoping has been devoted to antecedents and outcomes as opposed to the process itself. Given that firms may take up to 10 years to refocus (Donaldson, 1990), a considerable amount of time passes with the firm in turmoil. Research into the timing of different events as well as the effect of time spent restructuring on outcomes would be beneficial. Research on outcomes has been limited to a few years post-restmctu~ng so the long-term implications are unknown. At present we don’t know whether the short-term changes and improvements will last. In addition, refocusing can be voluntary and involuntary. Current research has not examined this potentially important difference. For example, do firms that engage in fire sales to avoid takeover benefit shareholders or help to maintain the status-quo of top management? Lastly, the area of corporate restructuring is complex as it occurs across all industries over considerable periods of time and has multiple implications. Research questions using simple univariate models may not detect these complex relationships. Similarly, as opposed to crosssectional relationships, longitudinal data and methods would better help us determine causality. Several problems can emerge in this type of research. Aggregating different types of res~ctu~ng into one sample may be a problem (e.g., LBOs, MBOs and EBOs or voluntary and involuntary restructuring). The second problem is knowing when the firm initiated refocusing and when the firm completed it. Firms engaging in restructuring initiated and completed activity throughout the 1980s and 1990s. Examining firms using the change in a given variable between 1980 and 1995 may obscure relationships. For example, Hitt et al. (fo~hco~ng) found that firms that had completed refocusing implemented strategic controls and increased R&D while firms that were still refocusing maintained financial controls and low levels of innovation. The use of change scores does not take these differences into account. The third concern also relates to change scores. Change scores often imply subtracting one year’s data from another and using the difference. This creates several potential methodologic~ and statistical problems. For example, subtracting diversified scope in 1980 from 1990 doesn’t imply that the differences indicate only acquisitions or divestitures. The firm may have reorganized or experienced fluctuating sales, which add or detract from the difference; hence, we must also pay attention to how we measure/study diversified scope. Lastly, many announcements during refocusing efforts, such as subsequent divestitures and layoffs, may be partially anticipated if a firm makes an initial refocusing announcement (see Malatesta & Thompson, 1985, for a detailed discussion). Markides (1992a) found a positive abnormal return to shareholders upon the announcement of a refocusing effort. Any subsequent divestitures may not be accurately valued if the initial announcement is not taken into account. In many cases, the firms may not make an ~nouncement and may simply engage in divestitures. Lastly, focusing on a single divestiture may also represent the divestiture of a mistake or a tactical move (e.g., Lang et al., 1995) and not a strategic change. JOURNAL OF MANAGEMENT,

VOL. 22, NO. 3,1996

CORPORATE

479

REFOCUSING

Conclusion At present, research on corporate restructuring resembles a giant jigsaw puzzle. We have a fair number of the pieces, but we are not sure where they all fit. Undoubtedly, we are missing many pieces from the puzzle, and we may find some pieces fit better in a different location. We need to integrate the various pieces of the puzzle to sort out cause and effect as well as the efficacy of different restructuring modes. The goal of this paper has been to review the various works on corporate downscoping to determine what we know and what we still need to examine to increase our understanding of this complex phenomenon. The process of refocusing or de-diversification to produce “leaner and meaner” firms has affected almost all industries in some way during the 1980s and into the 1990s. Restructuring activity has continued into the 1990s despite the reduction in takeover activity. Research in this area needs to continue to help academics and practitioners alike better understand the process and determine how to maximize the benefits while avoiding the pitfalls.

Acknowledgement:

I would like to thank Allen C. Bluedom, Donald D. Bergh, and Rita D. Kosnik for helpful comments on earlier drafts of this manuscript.

References Alexander, G.J., Benson, P.G. & Kampmeyer, J.M. (1984). Investigating the valuation effects of announcements of voluntary corporate selloffs. Journal of Finunce, 39: 503-5 17. Amburgey, T.L., Kelly, D. & Barnett, W.P. (1993). Resetting the clock: The dynamics of organizational change and failure. Administrative Science Quarter/y, 38: 5 l-73. Baysinger, B.D. & Hoskisson, R.E. (1989). Diversification strategy and R&D intensity in large multiproduct firms. Academy of Management Journal,32: 3 10-332. Berger, P.G. & Ofek, E. (1995). Diversification’s effect on firm value. Journal ofFinuncial Economics, 37; 39-65. Bergh, D.D. (1996). Product-market uncertainty, portfolio restructuring, and performance: An informationprocessing and resource-based view. Working paper, Pennsylvania State University. Bergh, D.D. (1995). Size and relatedness of units sold: An agency theory and resource-based perspective. Srrategic Management Journal, 16: 221-239.

Bergh, D.D. & Lawless,

M.W. (1992). Effects of environmental uncertainty and diversification on portfolio restructuring: A fransuction cosf model. Paper presented at the annual Academy of Management Meeting,

Las Vegas, Nevada. Bethel, J.E. & Liebeskind,

J. (1993). The effects of ownership

structure

on corporate

restructuring.

SwateRic

Management Journal, 14 (Special Issue): 15-32.

Bethel, J.E., Liebeskind, J. & Opler, T. (1995). Block share purchases and corporate performance. Working paper, Ohio State University. Bhagat, S., Shleifer, A. & Vishny, R.W. (1990). Hostile takeovers in the 1980s: The return to corporate specialization. Brookings Papers on Economic Activity, Microeconomics 1990: l-72. Bhide, A. (1990). Reversing corporate diversification. Journul ofApplied Corporate Finance, 3: 70-81. Bowman, E.H. & Singh, H. (1993). Corporate restructuring: Reconfiguring the firm. Srrafegic Manugement Jour. nal, 14 (Special Issue): 5-14. Brickley, J. &Van Drunen, L. (1990). Internal corporate restructuring: An empirical analysis. Journal ofAccounting and Economics, 12: 25 l-280. Brockner, J., Davy, J. & Carter, C. (1988). Layoffs, self-esteem, and survivor guilt: Motivational, affective, and attitudinal consequences. Pp. 279-290 in K.S. Cameron, RI. Sutton, and D.A. Whetten (Eds.), Readings in organizational decline. Cambridge: Ballinger. Brockner, J., Grover, S., O’Malley, M.N., Reed, T.F. & Glynn, M.A. (1993). Threat of future layoffs, self-esteem, and survivors reactions: Evidence from the laboratory and the field. Strategic Management Journal, 14 (Special Issue): 153-166. Brown, D.T., James, CM. & Mooradian, R.M. (1994). Asset sales by financially distressed firms. Journal of Corporute Finance, I: 233-257.

JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

480

RICHARD

A. JOHNSON

Chang, S.J. (1996). An evolutionary perspective on diversification and corporate restructuring: Entry, exit, and economic performance during. Working paper, Korea University, Seoul, Korea. Chatterjee, S. (1992). Sources of value in takeovers: Synergy or restructuring-implications for target and bidder firms. Strategic Management Journal, 13: 268-286. Chatterjee, S. & Kosnik, R.D. (1995). The antecedents ofcorporate restructuring: Internal or external controls? Paper presented at the annual Academy of Management Meeting, Vancouver, Canada. Comment, R. & Jarrell, G.A. (1995). Corporate focus and stock returns. Journal of Financial Economics, 37: 67. 87. Cusatis, P.J., Miles, J.A. & Woolridge, J.R. (1993). Restructuring through spinoffs: The stock market evidence. Journal of Financial Economics, 33: 293-3 11. Dial, J. & Murphy, K.J. (1995). Incentives, downsizing, and value creation at General Dynamics. Journal of Financial

Economics,

37: 261-314.

Donaldson, G. (1990). Voluntary restructuring: The case of General Mills. Journal of Financial Economics, 27: 117-141. Duhaime, I.M. & Grant, J.H. (1984). Factors influencing divestment decision-making: Evidence from a lield study. Strategic Management Journa!, 5: 301-318. Franks, J. & Mayer, C. (1996). Hostile takeovers and the correction of managerial failure. Journal c>fFinancial Economics, 40: 163-18 1. Fox, I. & Marcus, A. (1992). The causes and consequences of leveraged management buyouts. Academy of Management

Review, 17: 62-85.

Gibbs, P.A. (1993). Determinants of corporate restructuring: The relative importance of corporate governance, takeover threat, and free cash flow. Strategic Management Journal, 14 (Special Issue): 51-68. Goodstein, J., Gautam, K. & Boeker, W. (1994). The effects of board size and diversity on strategic change. Strategic Management

Journal,

15: 241-250.

Grinyer, P. & McKieman, P. (1990). Generating major change in stagnating companies. Strategic Management Journal, 11 (Special Issue): 131-146. Hambrick, D.C. & Schector, S.M. (1983). Turnaround strategies for mature industrial-product business units. Academy of Management

Journal,

26: 231-248.

Hamilton, R.T. & Chow, Y.K. (1993). Why managers divest+vidence Strategic Management

Journal,

from New Zealand’s

largest companies.

14: 479-484.

Hatfield, D.E., Liebeskind, J. P. & Opler, T.C. (1996). The effects of corporate restructuring on aggregate industry specialization. Strategic Management Journal, 17: 55-72. Hearth, D. & Zaima, J. (1984). Voluntary corporate divestitures and value. Financial Management, 13: 10-16. Hill, C.W.L. & Hoskisson, R.E. (1987). Strategy and structure in the multiproduct firm. Academy ofManagement Review, 12: 331-341.

Hirschey, M. & Zaima, J.K. (1989). Insider trading, ownership structure and the market assessment of corporate sell-offs. Journal of Finance, 44: 971-980. Hite, G.L. & Owers, J.E. (1983). Security price reactions around corporate spin-off announcements. Journal of Financial

Economics,

12: 409-436.

Hite, G.L., Owers, J.E. &Rogers, R.C. (1987). The market for intertirm asset sales: Partial sell-offs and total liquidations. Journal of Financial Economics, 18: 229-252. Hitt, M.A., Hoskisson, R.E., Johnson, R.A. & Moesel, D.D. (forthcoming). The market for corporate control and firm innovation. Academy of Management Journal. Hitt, M.A., Hoskisson, R.E. & Ireland, R.D. (1990). Mergers and acquisitions and managerial committment to innovation in M-form firms. Strategic Management Journal, II (Special Issue): 29-47. Hitt, M.A. & Keats, B.W. (1992). Strategic leadership and restructuring: A reciprocal interdependence. Pp. 45-61 in R.L. Phillips and J.G. Hunt (Eds.), Strategic leadership: A multiorganizational-level perspective. Westport, CT: Quorum Books. Hoskisson, R.E. & Hitt, M.A. (1994). Downscoping: How to tame the diversified$rm. New York: Oxford University Press. Hoskisson, R.E. & Hitt, M.A. (1990). Antecedents and performance outcomes of diversification: A review and critique of theoretical perspectives. Journal of Management, 16: 461-509. Hoskisson, R.E. & Hitt, M.A. (1988). Strategic control systems and relative R&D investment in large multi-product firms. Strategic Management Journal, 9: 605-621. Hoskisson, R.E., Hitt, M.A. & Hill, C.W.L. (1991). Managerial risk taking in diversified firms: An evolutionary perspective. Organization Science, 2: 296-313. Hoskisson, R.E., Hitt, M.A., Johnson, R.A. & Grossman, W. (1996). The effects of internal governance and ownership control on corporate entrepreneurship. Working paper, Texas A & M University. Hoskisson, R.E. & Johnson, R.A. (1992). Corporate restructuring and strategic change: The effect on diversification strategy and R&D intensity. Strategic Management Journal, 13: 625-634. JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

481

REFOCUSING

Hoskisson, R.E., Johnson, R.A. & Moesel, D.D. (1994). Corporate divestiture intensity in restructuring firms: Effects of governance, strategy and performance. Academy of Management Journal, 37: 1207- 125 1. Hoskisson, R.E. & Turk, T.A. (1990). Corporate restructuring: Governance and control limits of the internal capital market. Academy of Management Review, 15: 459-477. Ito, K. (1995). Japanese spinoffs: Unexplored survival strategies. Strategic Managemenf Journal, 14: 431446. Jain, P.C. (1985). The effect of voluntary sell-off announcements on shareholder wealth. Journal of Finance, 40: 209-224.

Jensen, MC. (1993). The modem industrial revolution, of Finance,

exit, and the failure of internal control systems. Journal

48: 83 l-880.

Jensen, M.C. (1991). Corporate control and the politics of finance. Journal of Applied Corporare Finance, 4: 1333.

Jensen, M.C. (1986). Agency

costs of free cash flow, corporate

finance

and takeovers.

American

Economic

Review, 76: 323-329.

Jensen, M.C & Murphy, K. (1990). CEO incentives: Its not how much you pay, but how. Harvard Business Review, 68: 138-147. Johnson, R.A., Bergh, D.D. & Grossman, W. (1994). Ownership control and corporate restructuring. Paper presented at the 14th annual Strategic Management Conference, Jouy-en-Josas, France. Johnson, R.A., Hoskisson, R.E. & Hitt, M.A. (1993). Board of director involvement in restructuring: The effects of board versus managerial controls and characteristics. Sfrafegic Management Journal, 14 (Special Issue): 33-50. Johnson, R.A., Hoskisson, R.E. & Margulies, N. (1990). Corporate Restructuring: Implications for organization change and development. Pp. 141-166 in R.W. Woodman & W.A. Pasmore (Eds.), Research in organizarional change and development, Vol. 4. Greenwich, CT: JAI Press. Kaplan, S.N. (1989). The effcts of management buyouts on operating performance and value. Journal of Financial Economics,

Kaplan,

24: 217-254.

S.N. & Weisbach, Finance,

M.S. (1992). The success of acquisitions:

Evidence

from divestitures.

Journal

of

57: 107-138.

Klein, A. (1986). The timing and substance of divestiture announcements: Individual, simultaneous and cumulative effects. Journal of Finance, 41: 685-696. Kochhar, R. & David, P. (1996). Institutional investors and firm innovation: A test of competing hypotheses. Strategic Management

Journal,

17: 73-84.

Kose, J., Lang, L.H.P. & Netter, J. (1992). The voluntary restructuring of large firms in response to performance decline. Journal of Finance, 47: 891-911. Kose, J. & Ofek, E. (1995). Asset sales and increase in focus. Journal of Financial Economics, 37: 105- 126. Kosnik, R.D. (1990). Effects of board demography and directors’ incentives on corporate greenmail decisions. Academy of Management Journal, 33: 129-150. Lang, L., Poulsen, A. & Stulz, R. (1995). Asset sales, firm performance, and the agency costs of managerial discretion. Journal of Financial Economics, 37: 3-37. Lee, W.B. & Cooperman, ES. (1989). Conglomerates in the 1980s: A performance appraisal. Financial Management, 18: 45-54.

Lei, D. & Hitt, M.A. (1995). Strategic restructuring and outsourcing: The effect of mergers and acquisitions and LBOs on building firm skills and capabilities. Journal ofManagement 21: 835-859. Lichtenberg, F.R. (1990, January 16). Want more productivity? Kill that conglomerate. Wall Streei Journal, p. A16. Liebeskind, J.P. & Opler, T.C. (1993). The causes of corporate refocusing. Working paper, University of Southern California, Los Angeles. Liebeskind, J.P., Opler, T.C. & Hatfield, D.E. (1996). Corporate restructuring and the consolidation of U.S. industry. Journal of Industrial Economics 44: 53-68. Liebeskind, J.P., Wiersema, M.F. & Hansen, G. (1992). LBOs, corporate restructuring, and the incentive intensity hypothesis. Financial Management, 21: 73-88. Long, W.F. & Ravenscraft, D.J. (1993). LBOs, debt and R&D intensity. Strategic Management Journal, I$(Special Issue): 119-136. Malatesta, P.H. & Thompson, R. (1985). Partially anticipated events: A model of stock price reactions with an application to corporate acquisitions. Journal of Financial Economics, 14: 237-250. Markides, CC. (1995). Diversification, restructuring and economic performance. Strategic Managemenf Journal, 16: 101-118.

Markides, CC. (1992a). Consequences

of corporate refocusing:

Ex ante evidence. Academy ofManagement

Jour-

nal, 35: 398-412.

Markides,

C.C. (1992b). The economic characteristics

of de-diversifying

firms. British Journal of Management,

3: 91-100.

JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3,1996

482

RICHARD A. JOHNSON

Markides, C.C. (1990). Corporate refocusing and economic performance, 1981-1987. Unpublished doctoral dissertation, Harvard Business School. Mergers & Acquisitions. (1990). The M&A bonanza of the ’80s. and its legacy. Vol. 24(5): 90.95. Meyer, A.D., Brooks, G.R. & Goes, J.B. (1990). Environmental jolts and industry revolutions: Organizational responses to discontinuous change. Strategic Managemenf Journal, 1 I (Special Issue): 93- 110. Miles, J.A. & Rosenfeld, J.D. (1983). The effect of voluntary spin-off announcements on shareholder wealth. Journal of Finance, 38: 1597- 1606. Montgomery, C.A. & Thomas, A.R. (1988). Divestment: Motives and gains. Strategic Management Journal, 9: 93-97.

Montgomery, CA., Thomas, A.R. & Kamath, R. (1984). Divestiture, market valuation, and strategy. 830-840. Murphy, K. (1985). Corporate performance and managerial remuneration: An empirical analysis. Jourrzctl of Accounting and Economics, 7: 1 l-42. Norman, P.M. (1995). Downsizing and organizational performance: Empirical evidence. Paper presented at the annual Academy of Management Meeting in Vancouver, Canada. Palmer, D., Zhou, X., Barber, B.M. & Soysal, Y. (1995). The friendly and predatory acquisition of large U.S. corporations in the 1960s: The other contested terrain. American Sociological Review, 60: 469-499. Porter, M.E. (1987). From competitive advantage to corporate strategy. Harvard Business Review, 65(3): 43-59. Prechel, H. (1994). Economic crisis and the centralization of control over the managerial process: Corporate restructuring and Neo-Fordist decision-making. American Sociological Review, 59: 723-745. Ravenscraft, D.J. & Scherer, F.M. (1991). Divisional sell-off: A hazard function analysis. Managerial and Dccision Economics,

12: 429-438.

Ravenscraft, D.J. & Scherer, F.M. (1987). Mergers, sell-o@ and economic eflciency. Washington, DC: The Brookings Institution. Reilly, A.H., Brett, J.M. & Stroh, L.K. (1993). The impact of corporate turbulence on managers’ attitudes. Strategic Management Journal, 14 (Special Issue): 167-179. Robbins, D.K. & Pearce, J.A. (1992). Turnaround: retrenchment and recovery. Strategic Management Journal, 13: 287-309.

Robins, J.A. (1993). Organization as strategy: restructuring production in the film industry. Strategic Management Journal, 14 (Special Issue): 103- 118. Roll, R. (1986). The hubris hypothesis of corporate takeovers. Journal of Business, 59: 197-216. Rosenfeld, J.D. (1984). Additional evidence on the relation between divestiture announcements and shareholder wealth. Journal of Finunce, 39: 1437-1448. Schipper, K. & Smith, A. (1986). A comparison of equity carve-outs and seasoned equity offerings: Share price effects and corporate restructuring. Journal of Financial Economics, IS: 153-186. Schipper, K. & Smith, A. (1983). Effects of recontracting on shareholder wealth: The case of voluntary spin-offs. Journal

of Financial

Economics,

12: 437-467.

Seth, A. & Easterwood, J. (1993). Strategic redirection in large management buyouts: The evidence from postbuyout restructuring activity. Strategic Management Journal, 14: 251-274. Seward, J.K. & Walsh, J.P. (1996). The governance and control of voluntary corporate spin-offs. Strategic Management

Journal,

17: 25-39.

Shleifer, A. & Vishny, R.W. (1991). Takeovers in the ’60s and the ’80s: Evidence and implications. Strutegic Management Journal, 12 (Special Issue): 51-60. Sicherman, N.W. & Pettway, R.H. (1992). Wealth effects for buyers and sellers of the same divested assets. Financial Management, 21: 119.128. Singh, H. & Chang, S.J. (1996). Business turnover and corporate performance: Learning from exploration. Working paper, The Wharton School. Slovin, M.B., Sushka, M.E. & Ferraro, S.R. (1995). A comparison of the information conveyed by equity carveouts, spin-offs, and asset sell-offs. Jourmd cjfFinancia1 Economics, 37: 89-104. Smart, D.L. & Hitt, M.A. (1996). A test of the agency theory perspective of corporate restructuring. Working paper, University of Nebraska at Omaha. Smart, D.L. & Hitt, M.A. (1994). A mid-range theory regarding the antecedents of restructuring types: An integration of agency, upper echelon and resource-based perspectives. Pp. 159-186 in P. Shrivastava, A. Huff & J. Dutton (Eds.), Advances in strategic manngement, Vol. 10A. Greenwich, CT: JAI Press. Splitting up: The other side of merger mania. (1985, July 1). Business Week, pp. 50-55. Stewart, G.B. & Glassman, D.M. (1988). The motives and methods of corporate restructuring, part II. Journal ff Applied

Corporate

Finance,

I: 79-88.

Surge in restructuring is profoundly altering much of U.S. industry. (1985, August 12). Wall Street Journal, p. 1A. Tehranian, H., Travlos, N.G. & Waegelein, J.F. (1987). The effect of long-term performance plans on corporate sell-off-induced abnormal returns. Journal c>fFinunce, 42: 933-942. Turk, T.A. & Baysinger, B. (1989). The impact of public policy on corporate strategy: Taxes, antitrust policy, and diversification clienteles. Working paper, Texas A & M University. JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996

CORPORATE

REFOCUSING

483

Walsh, J.P. & Kosnik, R.D. (1993). Corporate raiders and their disciplinary role in the market for corporate control. Academy ofManagement Jourruzl, 36: 67 I-700. Wiersema, M.F. & Liebeskind, J.P. (1995).The effects of leveraged buyouts on corporate growth and diversification in large firms. Strategic Management Journal, 16: 447-460. Williams, J.R., Paez, B.L. & Sanders, L. (1988). Conglomerates revisited. Strafegic Management Journal, 9: 403414. Woo, C.Y., Willard, GE. & Daellenbach, U.S. (1992). Spin-off performance: A case of overstated expectations? Strategic Management Journal, 13: 433-441. Worrell, D.L., Davidson, Wd.N. & Sharma, V.M. (1991). Layoff announcements and stockholder wealth. Acudemy ofManagement Journal, 34: 662-678. Zajac, E.J. & Kraatz, M.S. (1993). A diametric forces model of strategic change: Assessing the antecedents and consequences of restructuring in the higher education industry. Strategic Management Journal, I4 (Special Issue): 83-102.

JOURNAL

OF MANAGEMENT,

VOL. 22, NO. 3, 1996