Turnaround Strategy of Financially Distressed Company: Empirical Study of Manufacturing Company Listed on Indonesia Stock Exchange
Abstract
The purpose of this article is to examine financially distressed companies in Indonesia and their restructuring strategies. The strategies we observed are merger and acquisition, CEO turnover, and employee lay-off. This study tries to identify the difference of abnormal return and average abnormal return before and after the strategies announcement. This study uses event study and market model method. Through purposive sampling, 30 companies were categorized as financially distressed using Altman z-score in the period of 2009–2011, and 14 events were identified as turnaround strategies in the period of 2012–2017 as the sample. The observation period was 10 days prior to, 1 day during, and 10 days following the strategies announcement. The research variables are abnormal return assessed using One Sample t-test and average abnormal return assessed using Paired Sample t-test. It was found out that there are three events of merger and acquisitions, five events of CEO turnover, and six events of employee lay-off. The result shows that there is a positive significant difference abnormal return in the merger and acquisition announcement and no significant difference abnormal return for CEO Turnover and Employee Lay-off. The second result shows that there are no significant differences in the average abnormal return of stock before and after merger and acquisition, CEO turnover, and employee lay-off.
Keywords: turnaround strategies, financial distress, abnormal return
References
[1] Altman, E. I. (2000). Predicting financial distress of companies: revisiting the Z-Score and ZETA models. Handbook of Research Methods and Applications in Empirical Finance, pp. 428–456. Retrieved from: https://doi.org/10.4337/9780857936097. 00027
[2] Almilia, L. S. and Kristijadi, E. (2014). Analisis rasio keuangan untuk memprediksi kondisi financial distress perusahaan manufaktur yang terdaftar di bursa efek Jakarta. Jurnal Akuntansi & Auditing Indonesia, vol. 1, no. 2, pp. 52–62.
[3] Arogyaswamy, K., Barker, V. L., and Ardekani, M. Y. (1995). Firm turnarounds: An integrative two-stage model. Journal of Management Studies, vol. 32, no. 4, pp. 493– 525.
[4] Ashayeri, J., Ma, N., and Sotirov, R. (2014). Supply chain downsizing under bankruptcy: A robust optimization approach. International Journal of Production Economics, vol. 154, pp. 1–15.
[5] Auqie, V. (2013). Dampak Merger dan Akuisisi Terhadap Abnormal Return dan Kinerja Keuangan Bidder Firm di Sekitar Tanggal Pengumuman Merger dan Akuisisi Pada Perusahaan yang Terdaftar di Bursa Efek Indonesia Periode 2009-2012. Jurnal Calyptra, vol. 2, no. 2, pp. 1–16.
[6] Chan, P. S. (1993). Management Decision managing successful turnarounds: Lessons from Global Companies. Management Decision Journal of Business Strategy European Business Review Iss Research in the Sociology of Work Management Decision, vol. 31, no. 3, pp. 243–262.
[7] Dahya, J. and McConnell, J. J. (2005). Outside directors and corporate board decisions. Journal of Corporate Finance, vol. 11, no. 1–2), pp. 37–60.
[8] de Young, R., Evanoff, D. D., and Molyneux, P. (2009). Mergers and acquisitions of financial institutions: A review of the post-2000 literature. Journal of Financial Services Research, vol. 36, no. 2, pp. 87–110.
[9] Dedman, E. and Lin, S. W. (2002). Shareholder wealth effects of CEO departures: Evidence from the UK. Journal of Corporate Finance, vol. 8, pp. 81–104.
[10] Denis, D. J. and Kruse, T. A. (2000). Managerial discipline and corporate restructuring following performance declines. Journal of Financial Economics, vol. 55, no. 3, pp. 391–424.
[11] Elayan, F. A., Swales, G. S., Maris, B. A., et al. (1998). Market reactions, characteristics, and the effectiveness of corporate layoffs. Journal of Business Finance and Accounting, vol. 25, no. 3–4, pp. 329–351.
[12] Gilson, S. C. (1990). Bankruptcy, boards, banks, and blockholders. Evidence on changes in corporate ownership and control when firms default. Journal of Financial Economics, vol. 27, no. 2, pp. 355–387.
[13] Gopinath, C. (1991). Turnaround: Recognizing decline and initiating intervention. Long Range Planning, vol. 24, no. 6, pp. 96–101.
[14] Grinyer, P. H., Mayes, D., and McKiernan, P. (1990). The sharpbenders: Achieving a sustained improvement in performance. Long Range Planning, vol. 23, no. 1, pp. 116– 125.
[15] Gubbi, S. R., Aulakh, P. S., Ray, S., et al. (2010). Do international acquisitions by emerging-economy firms create shareholder value the case of Indian firms. Journal of International Business Studies, vol. 41, no. 3, pp. 397–418.
[16] Gugler, K., Mueller, D. C., Yurtoglu, B. B., et al. (2003). The effects of mergers: An international comparison. International Journal of Industrial Organization, vol. 21, no. 5, pp. 625–653.
[17] Hofer, C. W. (1980). Turnaround strategies. Journal of Business Strategy, vol. 1, no. 1, p. 19.
[18] Jogiyanto, H. (2010). Event Study: Testing Capital Market Reactions Due to an Event [Studi Peristiwa: Menguji Reaksi Pasar Modal Akibat Suatu Peristiwa] (first edition). Yogyakarta: BPFE-Yogyakarta.
[19] Kam, A., Citron, D., and Muradoglu, G. (2010). Financial distress resolution in China – Two case studies. Qualitative Research in Financial Markets, vol. 2, no. 2, pp. 46–79.
[20] Kang, J. and Shivdasani, A. (1996). Does the Japanese governance system enhance shareholder wealth? Evidence from the stock-price effects of top management turnover. The Review of Financial Studies, vol. 9, no. 4, pp. 1061–1095.
[21] Lin, B., Lee, Z.-H., and Gibbs, L. G. (2008). Operational restructuring: Reviving an ailing business. Management Decision, vol. 46, no. 4, pp. 539–552.
[22] Maheshwari, S. K. (2000). Organizational decline and turnaround management: A contigency framework. The Journal for Decision Makers, vol. 25, no. 4, pp. 39–50.
[23] Mamduh, H. M. and Halim, A. (2007). Financial Statement Analysis [Analisis Laporan Keuangan] (third edition). Yogyakarta: STIE YKPN.
[24] Mitchell, M. L. and Mulherin, J. H. (1996). The impact of industry shocks on takeover and restructuring activity. Journal of Financial Economics, vol. 41, no. 2, pp. 193–229.
[25] Mutamimah. (2009). Tunneling or value added in strategy [Tunneling Atau Value Added Dalam Strategi]. Jurnal Manajemen Teori Dan Terapan, vol. 2, no. 2, pp. 161– 182.
[26] O’Neill, H. M. (1986). Turnaround and recovery: What strategy do you need? Long Range Planning, vol. 19, no. 1, pp. 80–88.
[27] Pearce II, J. A. and Robbins, D. K. (1994). Entrepreneural recovery strategies of small market share manufacturers. Journal of Business Venturing, vol. 9, pp. 91–108.
[28] Pearce II, J. A. and Robbins, K. (1993). Toward improve theory and research on business turnaround. Journal of Management, vol. 19, no. 3, pp. 613–636.
[29] Platt, H. D. and Platt, M. B. (2002). Predicting corporate financial distress: Reflections on choice-based sample bias. Journal of Economics and Finance, vol. 26, no. 2, pp. 184–199.
[30] Rani, N., Yadav, S. S., and Jain, P. K. (2013). Market response to the announcement of mergers and acquisitions: An empirical study from India. Vision: The Journal of Business Perspective, vol. 17, no. 1, pp. 1–16.
[31] Santana, M., Valle, R., and Galan, J. L. (2017). Turnaround strategies for companies in crisis: Watch out the causes of decline before firing people. BRQ Business Research Quarterly, vol. 20, no. 3, pp. 206–211.
[32] Schendel, D., Patton, G. R., and Riggs, J. (1976). Corporate turnaround strategies: A study of profit decline and recovery. Journal of General Management, vol. 3, no. 3, pp. 3–12.
[33] Suchard, J. A., Singh, M., and Barr, R. (2001). The market effects of CEO turnover in Australian firms. Pacific Basin Finance Journal, vol. 9, no. 1, pp. 1–27.
[34] Suhfriahtiningsih, E. (2017). Faktor-Faktor Yang Mempengaruhi Keberhasilan Proses Turnaround Pada Perusahaan Manufaktur. Jurnal Ilmu Dan Riset Akuntansi, vol. 6, no. 6, pp. 1–18.
[35] Telaumbanua, B. I. K. and Sumiyana. (2008). Event study: Pengumuman laba terhadap reaksi pasar modal (Studi Empiris, Bursa Efek Indonesia 2004-2006). Jurnal Manajemen Teori Dan Terapan, vol. 1, no. 3, pp. 106–127.
[36] Tourtellot, P. L. (2004). Successful corporate turnarounds: Operational expertise makes the difference. The Journal of Private Equity, vol. 7, no. 4, pp. 68–71.
[37] Vestari, M. and Farida, D. N. (2013). Analisis Rasio-Rasio Dan Ukuran Keuangan, Prediksi Financial Distress, Dan Reaksi Investor. Akrual, vol. 5, no. 1, pp. 26–44.
[38] Whiting, R. H. and Miller, J. C. (2008). Voluntary disclosure of intellectual capital in New Zealand annual reports and the “hidden value.” Journal of Human Resource Costing & Accounting, vol. 12, no. 1, pp. 26–50.
[39] Financial Service Authority number 32/POJK.04/2014 of 2014 concerning plan dan holding of general meeting of shareholders of public companies.
[40] Law of the Republic of Indonesia No. 40 of 2007 concerning Limited Ability Companies.