Academic journal article Academy of Accounting and Financial Studies Journal

The Survival of Firms That Take Special Charges for Restructurings and Write-Offs

Academic journal article Academy of Accounting and Financial Studies Journal

The Survival of Firms That Take Special Charges for Restructurings and Write-Offs

Article excerpt


In light of recent, well-publicized corporate failures, financial reporting practices are increasingly being scrutinized. One area of scrutiny includes special charges for restructurings and write-offs. This study investigates the survival of firms that take restructuring charges and write-offs. We examine whether the survival of these firms is associated with management's choice of labeling (i.e., restructuring charge or write-off) as well as with the amount and purpose of the charge. Using a sample of large negative special charge announcements during 1986-1992 and 1996-1998, we find that firms reporting smaller charges survive longer than those with larger charges, regardless of any business actions for improvement mentioned. We also find evidence of a decreasing probability of survival for firms using the label of "restructuring" for the charge. These results are consistent with the popular media perception that managers often seek to mask their firms' true performance using special charge labeling.


Financial reports may describe special or unusual charges, which are economic events beyond the normal ongoing economic activities of an enterprise (Ante 2003; Gallagher 2004). As used herein, a "special charge" is (or should be) the description of a loss related to an event that is unusual or infrequent in the context of the enterprise (Stice, Stice, & Skousen 2004). Examples of such special charges are the write-down or write-off of assets or a corporate restructuring.

However, the term "special charges" is often abused when companies classify unpleasant losses (instead of unusual or infrequent losses) as special charges. The ploy used when managers mislabel unpleasant losses as special charges is to create a (misleading) impression that the losses in question are outside the norm and hence something for which management should not be held responsible. An egregious example cited by the Wall Street Journal is Motorola which, at the time of October 2002, was proposing to include special (hence theoretically unusual or infrequent) charges for the fifteenth consecutive quarter.

Therefore, announcements of special charges may confuse investors who are trying to evaluate how well firms have performed and how well they will perform in the future. Further, as suggested by anecdotal reports, managers' choice of labeling special charges as either "restructuring charges" or "write-offs" may confuse investors even more. An example of the investing community's confusion about special charge announcements is found in the following Wall Street Journal excerpt: "A Wall Street analyst said, 'Every company we follow has a write-off. No one has any idea of what anyone is earning'" (Smith and Lipin 1996). Accounting regulators have shown concerns in line with this argument. The Wall Street Journal (January 22, 1999, A2) reported:

"The SEC said company executives concoct a rosy portrait of earnings growth through an assortment of illegal accounting maneuvers. Among other things, the SEC said, companies take excessive restructuring charges. The SEC believes many companies are going too far--taking excessive reserves or write-offs in order to manipulate their results and hide the real health of their business."

In this paper, we investigate whether the survival of firms making these special charges is associated with (1) the amount and purpose of the special charge, and (2) managers' labeling choices ("restructuring" or "write-off"). First, we analyze the association between the survival of firms that take restructuring charges or write-offs and the amount and specific purpose of the charge as described in the announcements. This analysis provides evidence on whether the survival of announcing firms is related to the economic substance of firms' restructuring charges or write-offs. Next, we investigate the relationship between the survival of announcing firms and the labeling of the charges described in the announcements. …

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