An Examination of SFAS 146 Restructuring Charges

This study examines whether SFAS 146 has restricted earnings management via restructuring charges. My empirical results indicate a significant decrease in the absolute and relative magnitude of excessive restructurings and a lower association between excessive restructurings and earnings smoothing after the standard's implementation. These findings suggest that the reporting of restructurings under SFAS 146 may have increased in quality. Furthermore, I investigate how the different effects of normal and excessive restructurings on future earnings growth have changed subsequent to the standard. My results reveal that excessive (normal) restructurings reported after SFAS 146 exhibit a higher (lower) association with one-year-ahead earnings growth than those reported before the standard. These findings imply that the "real effect of restructurings on short-term earnings growth may not have changed after the standard. Finally, having documented the earnings effect of restructurings, I examine whether the information is reflected in stock prices. My stock return tests reveal that normal restructurings are negatively and strongly associated with subsequent abnormal returns in the pre-SFAS 146 period, while such negative association is weaker in the post-SFAS 146 period. Thus, investors' perceptions of the implications of normal restructurings for future earnings growth may have improved following the standard.