Academic journal article Management International Review

Corporate Restructuring Patterns in the US and Germany: A Comparative Empirical Investigation

Academic journal article Management International Review

Corporate Restructuring Patterns in the US and Germany: A Comparative Empirical Investigation

Article excerpt

With companies from different areas of the world engaged in global competition, it is inappropriate for the study of corporate strategy to ignore cross-national dimensions. The research of corporate strategy is still most highly developed in the US. As early as the 1970s, it was extended to include some European settings, particularly with Harvard project, focussing on the applicability of Chandler's theories in the European context (for example, Channon 1973, Franko 1976, Dyas/Thannheiser 1976). More recently, the center of attention has shifted to Japan (for example, Kono 1984, Kagono et al. 1985, Hamel/Prahalad 1989). However, the pace and scope of development of these cross-national studies have not been commensurated with the surging importance of global competition, although there have been some excellent studies at both the macro and firm levels such as Doz (1986), Lodge and Vogel (1987), Porter (1990), Hamel and Prahalad (1989). Moreover, recent cross-national firm level studies - as surveyed in Rosenstein and Rasheed (1993) - have noticeably neglected one of the most important countries, Germany, which among the global players can be ranked along with the US and Japan (Kanter 1991).

In the strategy field, recent empirical firm-level studies on cross-national comparisons between the US and Germany have been so scarce that some of the practical research difficulties have not been well explored; however, early in the present project it became apparent that these difficulties are substantial. As a result, it seemed logical to choose a study limited in scope and confined to a single aspect of strategy. The subject chosen was corporate restructuring. This term is used to refer to significant and rapid changes in the firm's assets, capital structure or organizational structure (Singh 1993). In the latter part of the 1980s there was a noticeable increase in the US in this kind of cororate behavior (Bowman/ Singh 1990, Singh 1993), stimulating a large body of reserach (e.g., Bethel/Liebeskind 1993, Hoskisson/Johnson/Moesel 1994, Lewis 1990, Markides 1992). The importance of the subject was signaled when in 1993 a complete special issue of Strategic Management Journal was devoted to it. In the efforts to analyze and understand the incidence and effects of corporate restructuring, a wide variety of concepts and variables have been employed, including such diverse variables as downsizing of sales and employees, divestitures and other asset reductions, changes in leverage, excess cash flow, influence of corporate governance, patterns of share holding, effects of acquisition threats, and results in terms of financial performance and stock market returns. The two leading frameworks used in American studies of the restructuring trend in the 1980s are agency theory and the environmental approach. In a major study comparing the explanatory power of the two frameworks, Bethel and Liebeskind (1993) found that agency theory was superior.

Agency theory views managers as agents and stockholders as principals. The interests of principals and agents are not always congruent and tend to diverge (Jensen 1986, 1989). Contrary to the interests of the principals (shareholders), management (agents) often have a tendency to keep divident payments low and to increase free cash flow beyond the optimum point, using the retained resources to expand and to diversify. That kind of action makes management less subject to the discipline of the capital markets and, since size of firm is generally correlated with executive pay levels, works to the personal advantage of managers. To the extent that managers face weak governance on the part of boards of directors (representing shareholders), the agency gap is increased. The applicability of the agency approach with respect to restructuring is succinctly summarized in Bethel and Liebeskind (1993, p. 15):

"Agency theorists argue that restructuring during the 1980s was a correction for overexpansion and overdiversification during the 1960s and 1970s, when managers increased the size and scope of firms without increasing their value (Jensen 1986, 1991). …

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