| This study is the first research that thoroughly examines the value relevance of restructuring charges, i.e. whether restructuring charge is relevant to investors in valuing a firm. Our study finds that although the value relevance of restructuring charge is affected by profitability, as Khurana and Lippincott (2000) suggested, their conclusion that investors view restructuring charge of loss firms as value enhancing is not conclusive. Indeed, only those restructurings that are performance enhancing are priced positively. If a restructuring does not lead to improved operating performance, the associated charge is priced negatively regardless whether it is a profit or loss-making firm. We further present evidence that growth opportunities affect the value relevance of restructuring charge as well. Restructuring charges of high-growth firms are priced more than those of non-growth firms, probably because high-growth firms have greater advantages to exploit the emerging opportunities than non-growth firms in the event of restructuring. In addition, we find that when a profit firm reports restructuring charges routinely, the value relevance of the charge is impaired, whereas the repetitive restructuring charges have negative implication for a firm with poor earnings. We also find evidence that initial restructuring charges have a stronger association with returns than subsequent charges. Finally, we present evidence that EITF 94-3 improves the timeliness of reporting restructuring charges.; The release of EITF 94-3 consensus presents us an opportunity to examine the value relevance of individual components of restructuring charges. Our empirical findings suggest that the components of restructuring charges provide value relevant information to financial statement users. The results show that workforce reduction has a positive effect on market value for both the profit and loss firms. On the other hand, asset write-downs are negatively priced for the profit firms, whereas in the case of loss-making firms, inventory write-downs and lease termination costs are found to have negative value effects. |
