Corporate restructuring: A symptom of poor governance or a solution to past managerial mistakes?

Abstract

If one was to examine the academic literature for an explanation of the restructuring that we have witnessed in the last decade, the most prominent explanation to emerge would be the agency explanation. According to this explanation, firms with poor internal governance devices fail to monitor their managers appropriately who, as a result, engage in self-serving activities such as excessive diversification and short-term investments. This, in turn, leads to poor performance which invites the attention of corporate raiders who force the management of the firm either to undertake painful restructuring or become a takeover target. In this article, Costantinos Markides and Harbir Singh challenge this explanation by arguing that restructuring may be brought about by honest managerial mistakes in the choice of organizational structure rather than managerial excesses allowed by poor corporate governance. They further argue that these managerial mistakes are not identified and corrected in time because restructuring firms lack the appropriate internal controls. In this article, they offer empirical evidence to support their arguments.