Asset restructuring performance prediction for failure firms

AuthorHui Li,Qing Zhou,Lu‐Yao Hong,Qian‐Xia Chen
Published date01 October 2019
Date01 October 2019
Asset restructuring performance prediction for failure firms
Hui Li
| Qian-Xia Chen
| Lu-Yao Hong
| Qing Zhou
College of Tourism and Service
Management, Nankai University, Tianjin,
Department of Business, Tobacco
Monopoly Administration of Tiantai,
Taizhou, Zhejiang, China
School of Management, Hangzhou Dianzi
University, Hangzhou, China
Hui Li, College of Tourism and Service
Management, Nankai University, Tianjin,
Funding information
National Natural Science Foundation of
China, Grant/Award Number: 71571167
This study aims to forecast asset restructuring performance for failing public firms and
to test the effectiveness of different strategies of assets restructuring by using ten
models, including: standalone models of multivariate discriminant analysis (MDA),
logistic regression (Logit), probit, case-based reasoning (CBR), support vector
machine (SVM), and their bagged ensembles. Moreover, this study proposes a knowl-
edge base by collecting positive and negative samples and uses random down-
sampling method to pair success samples with failure samples in order to focus more
on real-happened failure samples when forming a balanced data set. After variables fil-
tering process, ten financial ratios, covering aspects of debt-paying, risk level, develop-
ment, and operating abilities, are identified as significantly efficient predictors. The
following empirical results are found, namely (a) adopting more means of asset res-
tructuring leads to a higher chance for performance improvement; (b) equity transfer,
asset stripping, and asset acquisition are the three most commonly used means, and
the last two are among the most efficient means; (c) compared to the other 9 models,
SVM has the most balanced prediction performance in terms of total accuracy, true
positive ratio, and true negative ratio; and (d) predicting a failing event of achieving
performance improvement with asset restructuring is more difficult than predicting a
successful event, which needs more focus with the state-of-the-art models.
asset restructuring, data mining, group forecasting, single forecasting, merger and acquisition,
possibility of performance improvement
G34; G33
With the development of the Chinese securities market and
global competition, listed companies are involved in various
abnormal situations, which could lead to significant deterio-
ration of firm performance, for example, negative net
income in two consecutive years. Public companies in
abnormal financial situations will be specially treated by the
Chinese Securities Regulatory Commission (CSRC), which
means that these firms are at high risk and could possibly be
removed from listing. In theory, liquidation improvement
and reorganization are two possible means for distressed
firms to recover (Abinzano, Seco, Escobar, & Olivares,
2009). Asset restructuring has become a strategy frequently
adopted by managers of Chinese specially treated public
companies to improve firms' performances after they are
labeled as special treatment. However, only 50% companies
improved their performance and recovered with asset
Correction added on October 10, 2019, after first online publication: Article
type updated to Blind Peer Review.
Received: 28 November 2018 Revised: 9 July 2019 Accepted: 11 July 2019
DOI: 10.1002/jcaf.22409
J Corp Acct Fin. 2019;30:2542. © 2019 Wiley Periodicals, Inc. 25
restructuring, while the other 50% firms still failed to
improve their performance (Schoenberg, 2006). Since a
firm's removal from listing will bring significant loss to its
managers and stakeholders, the possibility of performance
improvement after asset restructuring should be effectively
guaranteed. Therefore, an approach to predict the possibility
of performance improvement after asset restructuring is
extremely valuable for managers of specially treated listed
companies and the corresponding stakeholders.
Previous studies focused on positive and negative effects
resulted by asset restructuring from a statistical view of sam-
ples analysis. However, seldom of the previous studies could
predict the possibility of performance improvement of a spe-
cific asset restructuring strategy. An approach is expected to
be invented to help managers and stakeholders to predict the
accurate possibility for distressed firms' achievement of per-
formance improvement with asset restructuring and recovery
from special treatment. This study fulfills this expectation by
providing a strategic approach of asset restructuring perfor-
mance prediction. In order to help predict the possibility of
performance improvement with asset restructuring, we firstly
generated a knowledge base by collecting 265 specially
treated public companies that adopted the strategy of asset
restructuring in the last half decade, and then used random
down-sampling method to pair failure samples in order to get a
balanced data set helping models focus on more on the minor-
ity. After the variable-filtering process, 10 financial ratios cov-
ering aspects of debt-paying, risk level, development, and
operating abilities, were identified as significantly efficient pre-
dictors. Afterward, 10 models were built up and compared to
generate the best predictions, including three statistical models,
two intelligent models, and five group predictive models.
Empirical results demonstrate the usefulness of the strategic
approach in predicting the possibility of performance improve-
ment with asset restructuring for Chinese specially treated listed
companies. Thus, in addition to the classical perspectives on
asset restructuring from literatures, namely: financial, strategic,
behavioral, operational, cross-cultural, and psychological
aspects (Cartwright & Schoenberg, 2006), our work contributes
by providing significant insights from the new perspective of
2.1 |Concept of asset restructuring in China
Generally, asset restructuring is the process of recombina-
tion, adjustment, and configuration of a firm's asset distribu-
tion state or the reinstallment by the owner or controller of
the firm or an external economic agent. Chinese domestic
scholars define the concept of asset restructuring from differ-
ent perspectives. From the view of asset recombination, asset
restructuring includes not only the recombination of human,
financial, and material resources but also the recombination
of marketing resources. From the view of business adjust-
ment, asset restructuring refers to the recombination of a
firm's internal and external business through various chan-
nels for the purpose of improving its overall operating qual-
ity and profitability. The concept of asset restructuring in
China is broader and commonly divided into merger and
acquisition, stock transfer, asset stripping, asset replacement,
debt restructuring, stock repurchase, and other restructuring
behaviors, according to the operational means adopted by
managers of Chinese listed companies.
2.2 |Empirical perspective on effectiveness of
asset restructuring
2.2.1 |Empirical evidence of asset
restructuring from event study
An event study focuses on stock price fluctuation and abnor-
mally equity return when an event occurs in the financial mar-
ket within an expected time (Fama, Fisher, Jensen, & Roll,
1969). Significant equity returns were commonly claimed to be
found in the long run after pure acquisitions in the United
Kingdom and the U.S. markets. Under the real option fr ame-
work, stock price fluctuation caused by merger and acquisition
was further analyzed with 1,086 cases of listed companies of
2008). Its implications for abnormal announcement returns are
consistent with the available empirical evidences of positive
returns. The early studies focusing markets of the United States
and United Kingdom (Asquith, 1983; Franks & Harris, 1989)
generally found significant positive returns after acquiring.
Knowledge transfer and resource sharing (Ahuja & Katila,
2001; Capron & Pistre, 2002) are helpful for acquirers to gain
performance improvement. Besides the classical markets of
United States and United Kingodm, positive announcement
Canadian-listed acquirers (Ben-Amar & Andre, 2006). Even
for some specific industry like property-liability insurance,
mergers were also found to be value enhancing (Cummins &
Xie, 2008).
However, not all firms can benefit significantly with asset
restructuring in the long run. Significantly negative short-term
returns were reported sometimes from mergers and acquisi-
tions in the United Kingdom and the U.S. markets (Andrade,
Mitchell, & Stafford, 2001; Campa & Hernando, 2004). Even
though efficiency gain is believed to be one of the main
reasons enhancing performance improvement with asset
restructuring, this gain was not always yielded in mergers,
like the example of horizontal bank mergers with a sample set
covering 898 bank merger cases (Rhoades, 1993). One possi-
ble reason may be thatmerger and acquisition among efficient
26 LI ET AL.

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