Corporate Restructuring: Reconfiguring the Firm

Author(s): Edward H. Bowman and Harbir Singh

Source: Strategic Management Journal, Vol. 14, Special Issue: Corporate Restructuring
(Summer, 1993), pp. 5-14
Published by: Wiley
Stable URL: https://www.jstor.org/stable/2486417
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 Strategic Management Journal, Vol. 14, 5-14 (1993)

CORPORATE RESTRUCTURING: RECONFIGURING

THE FIRM
EDWARD H. BOWMAN AND HARBIR SINGH
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.

Corporate restructuring is an area of great interest to researchers in corporate strategy,

finance and organizational studies. In this chapter, we briefly review prior research on
corporate restructuring, and then introduce the articles in the special issue. In the papers
in the issue there are indications that restructuring can be performance-enhancing for the
firm, but it can also have significant unintended consequences. The papers in this issue
apply a broad range of research methods and theoretical perspectives to corporate
restructuring, its initiating forces, and its consequences.

Corporate restructuring is an area of great interest
to corporate strategy, finance and organizational
scholars. Aspects of restructuring have been
central to each field-for instance, the competi-
tive implication of changes in the firm's business
portfolio have been central to research in
corporate strategy, while the effectiveness of
organizational structure changes has been
addressed in organization theory. Despite con-
siderable research on aspects of restructuring,
the relationship between restructuring and its
consequences for the firm and its stakeholders is
unclear. A plausible explanation for this lack of
consensus is that restructuring is a complex and
multidimensional phenomenon. This Special Issue
presents research into various dimensions of
corporate restructuring and its consequences.
Although restructuring has gained great sali-
ence in recent years, the sale of businesses or
acquisitions of other corporations is not new to
corporate America. The merger wave of the
1980s was the fourth since the beginning of this
century. The principal difference between the
most recent merger wave and the previous ones
is one of scale: the target for takeover has often
been the large corporation, and the rationale
advanced for many transactions is the search for
greater efficiency through downsizing the firm.
Unlike the highly acquisitive period in the late
sixties, the eighties have been marked by high
levels of acquisitions, divestitures and buyouts
(see Bowman and Singh, 1990, for further
discussion). It is clear that the impact of
restructuring has been felt in almost every sector
of the U.S. economy. The reconfiguration of
European corporations in response to changes
in European markets suggests high levels of
restructuring activity in many key areas.
In this introductory paper, we present an
overview of the articles included in the Special
Issue and a synopsis of executive presentations
made at the Wharton School in the associated
conference, sponsored by the Reginald H. Jones
Center. Overall, this issue represents the state
of art on corporate restructuring and will help
to set the agenda for future research in the area.

Key words: Corporate restructuring, organizational

restructuring, financial restructuring, reconfiguration

0143-2095/93/050014-10$10.00
(? 1993 by John Wiley & Sons, Ltd.

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6 E. H. Bowman and H. Singh
CORPORATE RESTRUCTURING: THE
PRESENT CONTEXT
Restructuring can encompass a broad range of
transactions, including selling lines of business or
making significant acquisitions, changing capital
structure through infusion of high levels of debt,
and changing the internal organization of the
firm. Business portfolio restructuring may occur
through the sale of lines of business, which are
seen as peripheral to the long-term strategy of
the firm (see Singh and Chang, 1992, for the
performance implications of corporate
reconfiguration). Restructuring can also involve
a sequence of acquisitions and divestitures to
develop a new configuration of the lines of
business of the corporation. Capital structure
changes usually involve the infusion of large
amounts of debt to either finance leveraged
buyouts or to buy back stock from equity
investors, or to pay large one-time dividends.
Organizational restructuring is intended to
increase the efficiency and effectiveness of
management teams through significant changes
in organizational structure, often accompanied
by downsizing. Restructuring involving mainly
organizational structure change is often
accompanied by asset disposal or acquisition.
Corporate rhetoric about the motives behind
the somewhat drastic action of restructuring typi-
cally cites productivity enhancements, cost controls
and other actions designed to maximize shareholder
wealth. The financial press provides high visibility
to such assertions, in prominent feature articles in
popular business publications. The sources of gains
in the postrestructuring phase may be due to sale
of assets, operational efficiencies, or at times to a
new concept of the business.1
Rhetoric about newly discovered sources of
shareholder benefit is challenged by skeptics,
who adopt the position that if managers as agents
of stockholders were performing their roles
effectively, such pockets of undervaluation would
I An example of the latter idea of redefinition of the business
exists in the retailing industry, where acquirers such as
Campeau Corporation valued companies in part based on
their real estate holdings-yielding considerably higher
valuations than that obtained through the discounted stream
of future cash flows from traditionally defined retailing
operations. The subsequent bankruptcy of Campeau's Feder-
ated Department Stores creates doubts about whether
redefinition of the firm's businesses can result in sustainable
changes in the firm's valuation.
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not be as pervasive as the frequency of restructur-
ing activity indicates. Capital gains arising from
the sale of assets to more synergistic or related
acquirers than the parent corporation appear
to be a less controversial source of gain in
restructuring than claims of new-found oper-
ational efficiency. This has led to the argument
that the firm should only participate in businesses
at which it excels due to a shared core competence
or other specialized resource (see Singh, 1993).
In a study of the stock market's reactions to
corporate restructuring announcements in the years
1981-87, we found that the announcements were
not associated with significant abnormal returns,
on average (Bowman and Singh, 1993). We
included all three dimensions of restructuring-
portfolio, organizational and financial-in the
study. Three possible interpretations of the nonsig-
nificant average returns from restructuring are:
(a) restructuring announcements per se are not
credible unless prior events have occurred to signal
a coherent strategy for change, (b) that the
restructuring does not have any impact on future
income, or (c) investors may have anticipated the
restructuring event prior to the announcement, so
that no new information was presented in the
announcement. We prefer the first interpretation,
because restructuring involves sweeping changes in
the firm's portfolio, organization or capital struc-
ture, which should have some effects on future
income. To explore the issue further, we related
the stock market's reaction to restructuring
announcements with critical organizational and
strategic changes in the firm in a period up to 2
years prior to the restructuring. We found that
significant organizational changes were positively
associated with abnormal returns related to restruc-
turing. These results suggest that the stock market
considers a restructuring announcement as credible
(in terms of its impact on future income) if the
firm has made significant organizational changes
to prepare itself for restructuring. The positive
association between prior organizational changes
and restructuring announcements indicates that
restructuring has to be preceded with significant
organizational change for the announcement to be
favorably interpreted by investors.
Managerial perspectives on restructuring
At the Wharton Conference on Corporate
Restructuring, three senior executives presented

their views on challenges faced by managers. Dr.
Blaine Davis, Corporate Vice President for
Strategy at AT&T, Dr. James Emshoff, CEO of
Indecap Enterprises (and former President of
Citicorp, Diners Club) and Mr. Gene Remoff,
Vice President of Human Resources at ARA
Services spoke at the conference.
Dr. Blaine Davis discussed the postderegu-
lation changes at AT&T after 1984. On January
1, 1984, the company's revenues dropped by
more than 50 percent, its employment base by
62 percent and its asset base by 70 percent,
because of the breakup of the predecessor
company into the successor AT&T and the
operating companies. Although these figures
are misleading in the sense that assets were
reallocated into the various successor companies,
the perception of change at the level of top
management was not unlike the very radical
downsizing presented above. From 1984 to 1990,
there was a further downsizing of AT&T by
100,000 employees, to a total of 275,000
employees, the size that exists today. In the
course of this downsizing, there were several
new initiatives to restructure the organization.
In post-1984 era, there have been three CEOs:
Charles Brown, 1984-86, James Olson, 1986-88
and Robert Allen, 1988-present. Brown broke
up the previous (prederegulation) centralized
management system, and Olson consolidated the
company into 21 SBUs. Allen, in the period
after 1988, has consolidated the 21 SBUs into
four groups. AT&T has made large numbers of
acquisitions and alliances in the post-1984 period,
with an explicit emphasis on building new
capabilities to compete in new product and
geographic markets. The most salient move was
the acquisition of NCR, with objective of
providing AT&T with a strong platform in
computer hardware and revitalizing AT&T's
preexisting computer operations.
The impact of AT&T's restructuring has been
positive from a shareholder value perspective,
with a doubling of income between 1984 and
1991. From the point of view of employment,
there has been a 33 percent decline in workforce,
and a major cultural change in the corporation,
towards a more market-driven orientation. From
a top management point of view, there has been
rapid progress into new markets, but accompanied
by a sense that restructuring will be an ongoing
process but with more of an incremental flavor,
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Corporate Restructuring 7
as part of the adaptation of the firm to the
environment.
Ongoing restructuring was also the theme of
Dr. James Emshoff's remarks. Dr. Emshoff
suggested that restructuring is the major manage-
ment challenge of the 1990s. Several factors
converge to make restructuring the dominant
concern of top management. There is an ongoing
conversion of the economy to a service orien-
tation. International competition also has forced
firms to downsize their operations to keep their
costs in line with competition. There is also a
deintegration of organizations occurring because
of the rise of networking relationships between
the firm and its affiliates, Emshoff argued that
in many service industries, restructuring has
been very prevalent due to the delayering of
organizations. Because of the pervasiveness of
restructuring in service industries, firms which
are better prepared to take restructuring in their
stride will be better off than those which are
forced into it by crises.
Voluntary restructuring in the postbuyout firm
was the theme of the presentation by Gene
Remoff, of ARA Services (a major corporation
which went private through a management buyout
in 1984). Remoff discussed how human resource
management mirrored the new incentive structure
in the postbuyout firm after 1984. After the
financial restructuring, managers were very will-
ing to undertake portfolio restructuring to
redeploy the assets of the firm. In effect, after
the buyout, a heightened emphasis on cash flow
enabled the firm to reduce its diversification by
selling off peripheral operations. The sale of
assets facilitated the paydown of debt, and
the firm's equity value has increased through
operational efficiencies generated after the buy-
out. Success following the buyout resulted in a
substantial increase in the number of managers
with equity in the firm. The overall message of
Remoff's presentation was that for firms in
mature businesses with high levels of stable cash
flow, a management buyout can be an effective
restructuring mechanism.
In sum, the managerial presentations at
the conference indicated that decisions about
restructuring have become a major part of
long-term strategic planning. The presenters
believed that restructuring can be managed
effectively, but that there can be significant
negative consequences associated with poorly
8 E. H. Bowman and H. Singh
managed restructuring programs. Managerial
approaches to restructuring correspond well to
the 'crafting' metaphor of strategic decision-
making (Mintzberg, 1987), in the sense that
many adjustments appeared to be necessary
after the initial commitment to restructuring.
It was also clear from the postbuyout firm
(ARA Services) that the management buyout
resulted in sweeping changes in the firm, in
terms of its business portfolio, organizational
structure, incentives and human resource strat-
egy. Overall, the presentations underscored
the multidimensionality of restructuring and
emphasized the need to consider the conse-
quences of restructuring for competitive advan-
tage, performance and stakeholders.
PAPERS IN THE ISSUE
In Table 1, we list the papers in this Special
Issue in terms of their focus on portfolio,
organizational or financial restructuring. As is
clear from the table, the set of papers is quite
well balanced along the three dimensions of
change we discussed earlier. Many of the
papers address more than one dimension of
restructuring. Also, the set of articles covers a
broad range of restructuring events-from
leveraged buyouts, in the case of Long and
Ravenscraft, to the reconfiguration of vertically
integrated organizations into networks of coop-
eration among independent organizations, in
the case of Robins.
Table 1. Focus of the articles in the special issue
Portfolio Organizational Financial Consequence measures
Bethel/Liebeskind X Incidence of restructuring
Johnson/Hoskisson/Hitt X X Incidence of restructuring
Gibbs X X Incidence of restructuring
Hurry X Accumulating resources
Zajac/Kraatz X X Operating performance
Robins X X Economic performance
Long/Ravenscraft X X R&D investment, economic
Cannella/Hambrick X X Management turnover, economic
performance
Brockner/Grover/O'Malley/Reed/Glynn X Work motivation
Reilly/Brett/Stroh X Employee satisfaction/loyalty
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As shown in Table 2, the papers in this issue
use a range of research methods, data sources
and theoretical lenses to study the phenomenon
of corporate restructuring. Theoretical lenses
used in the articles in this issue range from
agency theory (used or referenced by many
of the articles) to theories about employee
motivation in the face of organizational change.
Research methods range from experimental
methods to empirical designs involving archival
data and pooled cross-sectional and time series
data. Units of analysis range from the corpor-
ation to individual managers. The range of
theories, methods and data sources highlights
the richness of the domain of corporate restruc-
turing. The diversity of theoretical lenses also
points to the multidimensionality of restruc-
turing.
PORTFOLIO RESTRUCTURING
Portfolio restructuring involves significant
change in the firm's configuration of lines of
business through acquisition and divestiture
transactions. There has been extensive research
on acquisitions, and a smaller but internally
consistent amount of research on corporate
divestitures. Research on acquisitions and
divestitures, as vehicles for portfolio restructur-
ing, can contribute to our understanding of the
overall phenomenon. However, we need to
insert the caveat that as a combination of
several transactions, the effects of portfolio
performance
 Corporate Restructuring 9

Table 2. Articles in the Special Issue: Method and theory

Paper Class of method Data source Theoretical lens

Bethel/Liebeskind Large sample design; Secondary Agency theory

cross section and time
series

Johnson/Hoskisson/Hitt Large sample Primary and Agency and upper

secondary- echelon theory
questionnaire and
archival

Gibbs Large sample Secondary-archival Agency theory

Hurry Theory building Secondary Options theory

Zajac/Kraatz Large sample design; Secondary Organizational adaptation

pooled cross-sectional
and time series

Robins Longitudinal, selected Secondary-archival Internalization theory

firms

Long/Ravenscraft Large sample design; Secondary Agency theory and capital

cross-section and time market imperfection
series arguments

Cannella/Hambrick Large sample Primary-questionnaire Upper echelon theory

Brockner/Grover/ Experimental Primary Employee motivation

O'Malley/Reed/Glynn

Reilly/Brett/Stroh Large sample of middle Primary-questionnaire Psychological contracts

managers and organizational
change

restructuring on financial performance go include management turnover, there is evidence

beyond the individual moves comprising the
program.
In the area of corporate acquisitions, it is
now a well-known result that stock market
returns to acquirers are, on average, small and
not statistically significant (Jensen and Ruback,
1983; Bradley, Desai, and Kim, 1983). Disaggre-
gating the total set of acquisitions into related
and unrelated transactions (with various proxies
for relatedness used in different studies) yields
no consistent pattern of significant returns to
acquirers (Chatterjee, 1986, Lubatkin, 1987,
Singh and Montgomery, 1987). There is some
evidence that related acquisitions may be
associated with lower levels of systematic risk
than unrelated acquisitions. In sum, although
acquisitions are effective vehicles to change the
portfolio of the firm, their effects on financial
value of the firm are unclear. If we broaden
the organizational consequence measures to
of significant turnover many years after the
event (Walsh, 1988). The paper by Cannella and
Hambrick explores how management turnover
following an acquisition affects performance of
the acquired firm. Turnover of executives after
acquisition is related to lower performance of
the acquired firm, suggesting that postacqui-
sition management is an important determinant
of success of an acquisition.
Interpreting restructuring in terms of changes
in the firm's business portfolio, Hurry presents
a formulation of the firm's evolution in terms
of investment in real strategic options. Using
this perspective, Hurry argues that strategic
alliances between U.S. and Japanese firms can
be interpreted as real strategic options, resulting
in future reconfiguration of the firms involved.
Over time, Japanese partners in the alliances
discussed by Hurry use their alliances with
U.S. partners as call options to restructure

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10 E. H. Bowman and H. Singh
their portfolios, while their U.S. partners
use the alliance as put options for financial
restructuring.
Bethel and Liebeskind study the effects of
the firm's ownership structure on corporate
restructuring initiatives in large firms during
1981-87. They find that pressure to restructure
the firm came from blockholders, whose owner-
ship of the firm's stock is positively associated
with downsizing and refocusing of the firm's
operations. Increased levels of institutional
stockholding are positively related to growth
but not increased diversification. Their results
are consistent with an agency theoretic expla-
nation of corporate refocusing initiatives.
Johnson, Hoskisson, and Hitt investigate
the role of corporate boards in initiating
restructuring. They find that outsider represen-
tation on corporate boards is positively associ-
ated with corporate restructuring. Emphasis
on strategic controls is negatively associated
with board-initiated corporate restructuring.
Increased equity stakes of managers and board
members are negatively associated with restruc-
turing. Their study of restructuring initiatives
indicates that board involvement in restructur-
ing is higher when controls on managerial
decisions and performance are not tied effec-
tively to strategy and when managerial equity
stakes in the firm are relatively low.
Zajac and Kraatz investigate strategic and
organizational change in the higher education
industry. Using longitudinal data over the last
two decades, they show how colleges have
restructured their degree programs in response
to environmental change. They show that
portfolio restructuring for these colleges is a
predictable, common and performance-enhan-
cing response to changes in their environments.
The study underscores the interconnection
between changes in the business portfolios of
service organizations and the organizational
dimensions of restructuring.
FINANCIAL RESTRUCTURING
An approach to restructuring that received a
lot of attention in the 1980s was the assumption
of large amounts of debt by public corporations.
This assumption of debt was driven by the
notion that the pressure of high interest
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payments would force managers to focus on
their core businesses, and not squander cash
flows from the core businesses in presumably
less rewarding diversification projects. The
argument is most applicable in mature industries
in which key success factors are very clear and
where investments on research and new business
development are not substantial enough to
absorb all the free cash flow (Jensen, 1989).
An important vehicle for financial restructuring
was the management buyout, in which manage-
ment teams, in conjunction with investor
groups, borrowed large amounts of money to
buy the firm from the public stockholders and
take it private. The assumption was that taking
the firm private allowed managers to get high
equity positions within the firm, which in turn
motivated them to minimize wasteful financial
practices in the firm. An alternative to manage-
ment buyouts was the leveraged recapitali-
zation, which did not result in the firm going
private, but also represented infusion of large
amounts of debt in the firm.
Long and Ravenscraft address the investment
strategy of the leveraged firm in their paper.
They address the controversy regarding the
removal of key slack resources in the firm as a
response to excessive leveraging (Lowenstein,
1985). Investment in research and development
is a key area of strategic investment, and one
which can best typify the costs of excessive
leverage. Long and Ravenscraft find that firms
tend to spend less on R&D following a buyout
than their industry average. Further, R&D
expenditure drops by about 40 percent after an
LBO. However, they also find that R&D-
intensive LBOs outperform their publicly held
(non-LBO) peers in their respective industries.
Post-LBO performance is higher by about 15
percent on average than pre-LBO performance.
The implication of the work is that LBOs do not
pose a long-term public policy problem.
Gibbs studies the relative importance of free
cash flow, takeover threats, and corporate govern-
ance (board composition and concentration of
equity ownership) in determining financial and
portfolio restructuring. All three of the forces
listed above influence financial restructuring.
Financial restructuring is equally explained by
free cash flow and by corporate governance
indicators. On the other hand, portfolio restruc-
turing is not influenced by free cash flow, but

is influenced by takeover threat and by the
governance structure of the firm. The results of
the research suggest that free cash flow is
one of several forces influencing corporate
restructuring, the others being the governance
structure of the firm and the incidence of
takeover threats.
ORGANIZATIONAL RESTRUCTURING
In the area of organizational restructuring, much
prior work emphasizes the ineffectiveness of
restructuring. Hannan and Freeman (1984) pro-
pose that restructuring in general is disruptive
and, thus, that it increases the rate of corporate
failure. They argue that the selection pressures
of population ecology reward organizations for
being reliable and accountable. Thus, the attempt
to adapt to environmental changes, particularly
through corporate overhaul, increases the firm's
probability of failure ceteris paribus.
This line of argument is furthered by Ambur-
gey, Kelly, and Barnett (1990) who argue that
change is hazardous because it destroys, by
definition, some of the firm's existing practices.
This destruction, they argue, must be
accompanied by a loss of corporate competence
due to the abandonment of familiar 'routines'.
Another proposition in this regard is that
reorganization may 'disrupt relationships with
external actors that organizations need to survive'
(Anderson, 1991: 4). Anderson cites the example
of Saatchi & Saatchi's loss of advertising cus-
tomers allegedly as a result of its mergers. This
disruption of key external relationships, if it
occurs, is detrimental to the firm because such
relationships are difficult to build and need
consistency and care to maintain them.
There is variation in the way authors view
the negative effects of restructuring on perform-
ance. Amburgey et al. (1990), for example,
claim that 'like a powerful elixir, organizational
change may be deadly-but if survived may
promise good health.' They therefore suggest
a greater hazard of failure in the near term
following organizational restructuring, but good
performance if the hazardous period is success-
fully weathered by the firm. Tushman and
Romanelli (1985) and Amburgey et al. (1990),
suggest that effectiveness is related to a coherent
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Corporate Restructuring 11
program of restructuring (succession is explicitly
mentioned by Tushman and Romanelli).
The papers in this issue present new insights
on organizational restructuring. Zajac and
Kraatz, in their study of the restructuring of
colleges in response to environmental changes
in the past 20 years, show that in fact
restructuring is beneficial to organizations.
Indeed, colleges that do not change perform
worse than those that restructure by adding
new professional degree programs. Zajac and
Kraatz conclude that restructuring is a common
and predictable response to radical changes in
the environment.
Robins also addresses organizational restruc-
turing in response to radical change in the
firm's environment. Using data on the film
production industry after World War II, Robins
compares the performance of independent film
productions with films produced internally by
a major studio. Using a sample of 393 films,
Robins finds that independent films had higher
average performance than studio films, but also
had a different and higher cost structure. Thus,
the primary motive for studios to contract out
production to independents was to secure new
types of products, rather than to seek the most
efficient means of production. The implication
is that outsourcing of production constituted a
strategy shift on the part of the studio not only
the search for a more efficient means of
production given a specific strategy. Addition-
ally, the Robins paper shows how organizational
restructuring was an effective response to
environmental change, and it was accompanied
by a shift in strategy and the firm's business
portfolio.
The paper by Brockner et al., addresses the
impact of layoffs on employee motivation and
worry about future layoffs. They find, using
two different studies, that survivors' reactions
to layoffs depend upon the threat of future
layoffs and their self-esteem. Employees with
lower self-esteem tended to worry more and
work harder in the presence of a significant
threat of future layoff. High self-esteem
employees did not worry more or work harder
under conditions of high threat of future layoff.
High self-esteem employees may be more
responsive to other factors than the threat of
future layoff, such as their long-term career
opportunities in the firm. For low self-esteem
12 E. H. Bowman and H. Singh
employees, the higher level of motivation in
response to the threat of future layoff may
come at the hidden cost of excessive worry.
The paper by Reilly, Brett, and Stroh addresses
the effect of corporate turbulence on managers'
attitudes towards their jobs and careers based
on a survey of middle managers in 49 business
units of 17 large corporations. They find that
organization breakup is positively associated with
career loyalty (as opposed to company loyalty),
as is financial restructuring. Growth is positively
associated with career loyalty and with job
involvement. The implication is that managers
have realized that the high corporate turbulence
they have witnessed is likely to continue. As a
result, they are prepared to change organizations,
and have therefore focused more on their careers.
In particular, younger managers have high levels
of career loyalty and place a lower premium on
job security than more experienced managers.
An implication is that if the economy improves,
firms may note a high level of turnover among
their managers, who were waiting for better
times to look for new opportunities.
Overall, the research presented in this issue
reports on patterns of organizational restructuring
that can be effective for the firm. The research
also shows some of the consequences of organi-
zational restructuring on employee motivation
and career loyalty.
CONCLUSION
After reviewing the various approaches taken in
researching elements of corporate restructuring,
we note the high level of diversity in theories
and in research questions investigated in each
area. Despite the variety, there are some
common threads.
Several papers in the issue show how restruc-
turing can in fact be a successful adaptation of
the firm to its environment. Zajac and Kraatz
show how institutions of higher learning (not
known to be the most fluidly adaptive of
organizations in general) which adapted success-
fully to changing educational needs of the
student population performed better than those
that did not. Similarly, Robins discusses how
major film studios began to outsource film
production from independents to broaden their
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product base, going for broader market cover-
age through this vehicle, rather than efficiency.
Thus, fairly radical organizational changes
accompanied business portfolio shifts in these
organizations, without dire economic conse-
quences to the organizations involved.
In the area of financial restructuring Long
and Ravenscraft discuss R&D spending in post-
LBO firms, and indicate that in fact post-LBO
firms have better operating performance after
buyout. Also, firms with high levels of R&D
spending after buyout tend to perform better
than their industry peers. Thus, financial
restructuring, when accompanied with invest-
ment in key strategic activities, can be effective
for the firm.
Hurry, in an options formulation of restruc-
turing, represents alliances as option invest-
ments by both partners. Alliances can be real
strategic call options (to be scaled up in
the event of a positive future outcome) for
restructuring the portfolio of one partner, and
can be a put option (in the event of a poor
financial outcome) for the other partner. Thus,
an options formulation of alliances can be
precursors to larger scale restructuring moves
by parent firms, as uncertainty about pay-offs
is resolved.
In a study of the incidence of restructuring,
Bethel and Liebeskind point out that block-
holder ownership is significantly correlated with
corporate restructuring, specifically downsizing
of the firm. Their findings also indicate that
institutional ownership in the firm is positively
associated with the expansion of the firm, while
insider ownership is not related to the incidence
of restructuring. This research underscores the
importance of linking the ownership structure
of the firm to restructuring.
Gibbs, in his study of the incidence of
restructuring, finds that free cash flow in the
firm leads to financial restructuring, and firms
with more outsiders on their boards are less
likely to restructure financially. The impli-
cations of Gibbs' work complement those of
Bethel and Liebeskind, in that the extent of
board independence from insiders and the
magnitude of free cash flow contribute to
financial restructuring of the firm.
Several areas of extension are suggested by
the papers published in this issue. The papers
represent very strong efforts to profile financial,

organizational and portfolio restructuring. More
work is needed to determine the conditions
under which firms can effectively restructure
its organizational structure and its business
portfolio.
Referring to Table 1, we note that the papers
used a range of outcome measures to document
the effects of restructuring on the firm. The
diversity of outcome measures attests to the
multidimensional consequences of restructur-
ing. An area that needs further attention is the
effect of restructuring on stakeholders such as
employees and communities. The papers by
Brockner, et al., and Reilly, Brett, and Stroh
are steps in that direction. Both papers indicate
that there are unintended consequences associ-
ated with restructuring. These unintended
consequences can be construed as externalities.
Externalities related to the phenomenon of
restructuring-the effects of restructuring
decisions on the implicit contracts between the
firm and its stakeholders-can be researched
further. Shleifer and Summers (1988) argue
that an effect of takeovers (one of the vehicles
for corporate restructuring) is to break prior
implicit contracts between management and
employees and replace them with new ones.
This nullification of prior implicit contracts
between employees and management can have
an impact on corporate loyalties. This argument
is very consistent with the arguments and results
of Reilly, Brett, and Stroh, which indicate that
the implicit contract between the firm and its
managers has been weakened by the high
level of corporate turbulence that firms have
experienced in the 1980s. Beyond the loss of
corporate loyalties, a significant subset of laid-
off corporate employees have been unable
to find employment with equivalent career
opportunities and compensation in other cor-
porations. Shleifer and Summers suggest that
such situations can result in a net societal cost,
and this situation needs further attention.
We are very pleased to present this strong
set of papers addressing corporate restructuring
with the depth and diversity apparent in their
respective choices of theory and method. Future
efforts that extend these efforts with similar
depth in method and theory will go a long way
in deepening our understanding of corporate
restructuring and its consequences for the firm
and for society.
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Corporate Restructuring 13
ACKNOWLEDGEMENTS
We wish to thank the Reginald H. Jones
Center for Management Policy, Strategy and
Organization at the Wharton School for its
support in funding the support work for this
Special Issue and associated conference. We
thank the panel of reviewers for the Special
Issue for their outstanding efforts to make the
issue possible. We also thank Dan Schendel
for giving us the opportunity to edit this Issue.
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