THE VALUE RELEVANCE OF THE COMPONENTS OF RESTRUCTURING CHARGES: THE EFFECT OF EITF 94-3

Abstract

In response to the dramatic increase in corporate restructurings and to prevent companies from managing earnings through aggressive accrual costs, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) released new accounting guidelines in 1994. Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), addressed issues of timing, recognition and measurement of restructuring charges, and required companies to disclose major restructuring actions and material cost components, among others. This study is the first to examine the value relevance of restructuring charge components, disclosed in the notes to financial statements under the requirements of EITF 94-3. The results show that restructuring charge components are value relevant, i.e. associated with market values, and the pricing of individual components is affected by the profitability of the firm during the year of restructuring. In addition, I find that investors consider most restructuring charges as having valuation effects different from other ordinary operating expenses, and the valuation of a restructuring charge is affected by its content and composition.