The Effectiveness of Corporate Restructuring: An Analysis‪.‬

INTRODUCTION In recent years, restructuring charges have been an increasingly common element on earnings statements. A restructuring charge is a company's estimate of the future costs of a major change in business strategy or operations, such as laying off a large percentage of its workforce, or closing an entire division. The financial press frequently reports a positive market reaction to restructuring, because a company's net income often improves, at least in the short run, in the wake of a non-routine charge against earnings. However, critics complain that such write-offs tend to increase immediate earnings without actual improvement in performance, and that repeated restructurings result in a blurred portrayal of the company's earnings trends. A further consequence of persistent restructuring has been complaints of overworked employees, low morale, dissatisfied customers, and excessive use of expensive contract workers. Such frequent and uncontrolled write-offs provided the impetus for the FASB to take steps to clarify and restrict the use of restructuring charges. During 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed," and EITF 95-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including certain costs incurred in a restructuring)."