Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of Business Restructuring on Firm Performance-Evidence from Publicly Traded Firms in China

Academic journal article Academy of Accounting and Financial Studies Journal

The Impact of Business Restructuring on Firm Performance-Evidence from Publicly Traded Firms in China

Article excerpt

ABSTRACT

Many publicly traded companies in China underwent significant business restructuring in the last several years to achieve higher operating efficiency and greater growth opportunities. This paper examines the impact restructuring had on the operational aspects of these firms. We used changes in revenue, profit margin, return on assets and the total asset turnover ratio before and after the restructuring as proxies for firm performance and conducted tests to determine whether business restructuring resulted in significant changes. We also examined the stock price reaction to the restructuring announcements. Our study showed that there were significant improvements in total revenue, profit margin, and return on assets following restructurings but there was no evidence of any significant impact on asset turnover ratio. The market reaction to the restructuring announcements was positive and statistically significant. We also found evidence of significant market anticipation and overreaction to the restructuring announcements.

INTRODUCTION

For historical reasons, the majority of the publicly traded companies listed on the exchanges in China are in traditional industries such as textile, chemical and machine building. Since the late 1990s, and especially after China's entry into the World Trade Organization, which opened the door much wider for imported foreign goods and services, many of these firms have been faced with declining domestic demand and increasing foreign competition. At the same time, the Chinese Government, concerned about the structure of the antiquated industrial base, made serious efforts to encourage companies in traditional industries to migrate into new industries with greater promises of growth and technological improvement. The 10th Five-Year Plan called for rapid development of financial, communication and information technology industries, while consolidating the petrochemical, automobile and electronics industries. As a result, many publicly traded companies, most in which the State had a controlling interest, decided to fundamentally restructure their businesses in recent years. They completely withdrew from the business or industry they were in and either entered a new business or industry believed to have better prospects or entered the new business or industry while continuing their existing business. According to published research, 192 listed companies went through restructuring in 1998 and 1999 (Zheng, 2000). Some of these firms were forced by poor financial results or a disappearing market. But, many were proactive and did the fundamental restructuring to seek new growth and profit potentials. Restructuring took place in three different ways: 1) merger and acquisition; 2) purchase of large block of shares in an existing company; 3) building new production facilities. Most of the restructuring companies withdrew from such industries as textile, chemical, machinery and steel where there was either severe competition or excess capacity. The industries they went into were mostly telecommunications, computer hardware or software, network, biotechnology, etc.

The purpose of this paper is to evaluate the impact of restructuring on these firms. As proxies for firm performance, we used revenue, profit margin, return on assets, and asset turnover ratio. We then conducted tests to determine whether business restructuring brought about significant, sustainable, and positive changes in revenue, profit margin, return on assets and the asset turnover in the restructuring firms. We also examined the market reaction to the restructuring announcements by using the conventional market model to estimate the cumulative abnormal returns at, before, and after the announcements.

The results of our study indicate that there are significant short-term improvements in total revenue, profit margin, and return on assets. Restructuring does not seem to have any significant impact on the asset turnover ratio. …

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