Discretionary write-downs, write-offs, and other restructuring provisions: a signalling approach

This paper introduces a model seeking to explain the discretionary write-downs, write-offs, and other restructuring provisions reported by managers. The model comprises a firm, a manager, and a financial market. The firm is about to be restructured. The manager has some private information about the likelihood of success of his restructuring action. The manager may recognise all or part of the expenditure associated with his future restructuring action by reporting a discretionary restructuring provision. The manager chooses whether or not to report a provision, recognising the impact of the provision on his compensation. The paper shows how. Under certain conditions, the manager may credibly communicate his private information to investors through his pro-vision policy. Testable implications are consistent with the empirical evidence reported by Strong and Meyer (1987), Elliott and Shaw (1988), and Zucca and Campbell (1992). [ABSTRACT FROM AUTHOR]