Asset restructuring performance prediction for failure firms

• Author: Hui Li,Qing Zhou,Lu‐Yao Hong,Qian‐Xia Chen
• Published date: 01 October 2019
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/jcaf.22409

BLIND PEER REVIEW

Asset restructuring performance prediction for failure firms

Hui Li

1

| Qian-Xia Chen

1

| Lu-Yao Hong

2

| Qing Zhou

3

1

College of Tourism and Service

Management, Nankai University, Tianjin,

China

2

Department of Business, Tobacco

Monopoly Administration of Tiantai,

Taizhou, Zhejiang, China

3

School of Management, Hangzhou Dianzi

University, Hangzhou, China

Correspondence

Hui Li, College of Tourism and Service

Management, Nankai University, Tianjin,

China.

Email: lihuihit@nankai.edu.cn

Funding information

National Natural Science Foundation of

China, Grant/Award Number: 71571167

Abstract

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.

KEYWORDS

asset restructuring, data mining, group forecasting, single forecasting, merger and acquisition,

possibility of performance improvement

JEL CLASSIFICATION

G34; G33

1|INTRODUCTION

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;30:25–42. wileyonlinelibrary.com/journal/jcaf © 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

prediction.

2|LITERATURE REVIEW

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

theUnitedStatesfrom1985to2002(Hackbarth&Morellec,

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

returnswerealsofoundinCanadianmarketwithasamplefrom

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.