The Value of Corporate Financial Measures in Monitoring Downturn and Managing Turnaround.
Corporate turnaround became a topic for strategy research four decades ago, when investigators studied firms that experienced severely declining financial performance. They researched firms that were liquidated or reorganized under bankruptcy laws, that languished or recovered modestly but were never able to regain their pre-downturn level of performance, and that overcame their troubles and returned to match or exceed their pre-downturn performance. Companies in the final category became known as turnaround firms. The study of such firms is the basis of research on corporate turnaround, the goal of which is to identify appropriate responses to the threat and actuality of financial decline. However, despite some advances, empirically supported methodologies for mapping the phases of the turnaround process and for determining the tactics that lead to successful turnarounds have remained elusive. Published research indicates that financial ratios hold promise for providing early warning signals of business failure. This study extends the literature on the value of financial ratios to organizational turnaround in four ways. First, it explores new conceptual ground by proposing and assessing linkages between financial ratios and the dramatically different strategic challenges of managing during decline, redirection, and re-establishment. Second, it presents a conceptual model of the turnaround process to guide the empirical analysis. Third, its methodology leads to a statistical grouping of relevant financial ratios associated with turnaround success. Finally, the model supported by this research suggests that the success of a company's turnaround tactics can be guided by financial ratios.
|Main Author:||Pearce II, John A.|