Restructuring cost and its prediction analysis

• Published date: 01 January 2024
• Author: Yi Ren,Dong Xiao
• Date: 01 January 2024
• DOI: http://doi.org/10.1002/jcaf.22659

Received: 22 June 202 3Accepted: 4 September 2023

DOI: 10.1002/jcaf.22659

RESEARCH ARTICLE

Restructuring cost and its prediction analysis

Yi Ren1Dong Xiao2

1Department of Accounting, Illinois State

University, Normal, Illinois, USA

2Department of Statistics, North Carolina

State University, Raleigh, North Carolina,

USA

Correspondence

Yi Ren, Department of Accounting,

Illinois State University, Normal,IL,USA.

Email: yren3@ilstu.edu

Abstract

Given the ever-increasing occurrence of corporate restructuring, the relevance

of accounting information related to restructuring became more important in

financial reporting. Wef irst examinehow restructuring cost affects stock returns

and find firms with significant restructuring costs have worse stock performance

compared with firms without significant restructuring costs. We then establish

prediction model to predict the incurrence of future restructuring cost. The per-

formance of the prediction model achieves an AUC (the area under curve) of .84

on the training data and an AUC of .77 when using out-of-sample validation.

KEYWORDS

restructuring cost, prediction model, ROC analysis

JEL CLASSIFICATION

C21, C53, G34

1 INTRODUCTION

A financially distressed firm may take restructuring

actions to improve its efficiency and profitability (Lai

&Sudarsanam,1997). According to lifecycle theory, cor-

porate restructuring is inevitable during the corporate

lifecycle because financial distress and default are funda-

mental stages in the lifecycle of firms (Koh et al., 2015).

Firms may also use voluntary restructurings as normal

corporate governance mechanisms in response to market

pressure (Donaldson, 1990; John et al., 1992). Indeed, there

is increasing occurrence of corporate restructuring in pub-

lic companies. For example, about 30% of the S&P 1500

companies reported restructuring costs between 2005 and

2007, whereas more than 35% of the S&P 1500 companies

reported restructuring costs between 2015 and 2017.In year

2018, the proportion reaches 37%. Typically, firms report

restructuring costs when they are undergoing restructur-

ing process, and often haveincurred such costs over several

years as restructuring may take years to complete. In fact,

a significant large number of firms reported restructur-

ing cost continuously. Among 1350 non-financial firms of

the S&P 1500 between 2015 and 2017, one-third of them

have restructuring costs in all 3 years.1

Much of research on corporate restructuring examined

the corporate governance of the restructuring process in

terms of restructuring choices and strategies in response

to performance decline and market pressures (e.g., Barker

& Duhaime, 1997; Denis & Kruse, 2000). In this study, we

focus on “restructuring costs” that reported on the finan-

cial statements. Restructuring costs reduce net income and

negatively affect firms’ financial performance. However,

market analysts often exclude such cost to calculate street

earnings (often referred to as “non-GAAP” earnings). This

study analyzes whether the stock market views restruc-

turing costs as a negative signal even though non-GAAP

earnings users may downplay such non-recurring costs.

We first examine the impact of restructuring costs on

firms’ stock performance. We differentiate firms with

1For example, COCA-COLA Co. had pretax restructuring cost of $983,

$3494, and $2887 million in fiscal year 2015, 2016, and 2017, respectively.

The pretax restructuring cost in 2016 was almost 4% of its average assets

during the period from 2014 to 2018.

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