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Does Retrenchment Boost Performance? Evidence from Fallen Angels

Author

Listed:
  • Farroukh, Karim

    (U of Washington)

  • Koski, Jennifer L.

    (U of Washington)

  • Werner, Ingrid M.

    (Ohio State U)

Abstract

We study restructuring by firms whose stock prices experience a sharp decline to a low price level-fallen angels. In response to a price decline, firms can retrench by reducing investments and cutting the workforce, or increase leverage and investments hoping for lottery-like payoffs. We find that relative to a matched sample, fallen angels retrench. While retrenchment helps boost stock prices, reducing fixed assets and employment also increase firm risk, lower growth opportunities, and reduce the probability a firm remains listed. We find no consistent evidence that retrenchment actions undertaken by fallen angels affect future operating performance.

Suggested Citation

  • Farroukh, Karim & Koski, Jennifer L. & Werner, Ingrid M., 2021. "Does Retrenchment Boost Performance? Evidence from Fallen Angels," Working Paper Series 2021-09, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2021-09
    DOI: 10.2139/ssrn.3866579
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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