FIRM RESTRUCTURING DURING AN ECONOMY-WIDE SHOCK ACROSS INSTITUTIONAL ENVIRONMENTS

Transcription

1 FIRM RESTRUCTURING DURING AN ECONOMY-WIDE SHOCK ACROSS INSTITUTIONAL ENVIRONMENTS Kulwant Singh Department of Strategy and Policy National University of Singapore 15 Kent Ridge Drive Singapore Tel: (65) Fax: (65) Ishtiaq P. Mahmood Department of Strategy and Policy National University of Singapore 15 Kent Ridge Drive Singapore Phone: (65) Fax: (65) Jinyan Zhu Triumpus capital 15 Scotts Road #08-13 Singapore Tel: (65) Fax: (65) An earlier version of this paper was presented at the Business Policy and Strategy Division, Academy of Management Meetings in August We thank Abhirup Chakrabarti, Inmoo Lee, Foo Maw Der, Navid Asgari, two anonymous reviewers and Editor Ed Zajac for their valuable comments and suggestions. We also appreciate financial support from the National University of Singapore Research Grant.

2 1 FIRM RESTRUCTURING DURING AN ECONOMY-WIDE SHOCK ACROSS INSTITUTIONAL ENVIRONMENTS Abstract We examine how firms restructure during an economy-wide shock and how the institutional environment affects restructuring and its outcomes. We draw primarily from institutional economics and resource-based theory to argue that access to internal and external resources and the extent of firm embeddedness within the institutional environment are key influences on the incidence and outcomes of restructuring. Results show that firms may increase or decrease restructuring during an economy-wide shock depending on their experience with change and adaptation before the shock, their performance during the shock and their affiliation with business groups. In most cases, restructuring during the shock improved performance. Results are consistent with the view that firm characteristics and institutional environments significantly influence restructuring and its outcomes during an economy-wide shock.

3 2 An economy-wide shock is a sudden, substantial and unanticipated change in the macroeconomic environment, whose impact spreads beyond specific firms or industries to disrupt wide sectors of an economy. Economy-wide shocks typically lead to a major and sudden slowdown in economic activity, with significant declines in business turnover, profitability, liquidity, investment, employment and optimism. The Great Depression of the 1930s in the US, currency crises in the 1980s and 1990s in Latin America, the Asian Economic Crisis of 1997 and the financial crises that struck many countries in 2007 are examples of economy-wide shocks. Economy-wide shocks, particularly those with financial roots, occur regularly (Mishkin, 2006; Reinhart and Rogoff, 2009) but attract little attention in strategy research. Recent economic research (Corsetti, Pesenti and Roubini, 1999; Hahm and Mishkin, 2000; Reinhart and Rogoff, 2009) has improved understanding of the causes of economy-wide shocks and their impact on macroeconomic variables such as trade, inflation and growth. Despite recent interest (e.g., Chakrabarti, 2009; Chang, 2006; Fisher, Lee and Johns 2004; Singh and Yip 2000; Wan and Yiu, 2009) strategy research has not systematically evaluated microeconomic responses to sudden, major shocks that affect the broad economic environment, limiting knowledge of the interface between these shocks and firm strategy (Suarez and Oliva, 2005). The breadth and severity of economy-wide shocks limit ambiguity about the extent of the threat and imply that firms have little choice other than to restructure, to adapt to the altered environment (Chattopadhyay, Glick and Huber, 2001). Restructuring is the deliberate modification of a firm's structure, resources or operations to improve alignment with a radically altered external environment. Restructuring differs from other forms of organizational change and adaptation in that it is primarily driven by sudden, major and adverse changes in the environment that negatively affect firm performance. However, disruption to internal and external markets during an economy-wide shock limits resources available to support restructuring and constrains the adaptation options available to firms. Thus, an economy-wide shock increases firms' motivation to restructure but reduces their ability to do so. This conundrum frames the two issues that are the focus of this paper, the occurrence and outcomes of

4 3 firm restructuring during an economy-wide shock, and how institutional environments influence restructuring and its outcomes. We propose that the nature and consequences of firm restructuring in response to an economy-wide shock depend on firm resources and institutional support. We first evaluate the incidence of restructuring during an economy-wide shock and how a firm's embeddedness in its institutional environment influences restructuring. We then examine the performance outcomes of restructuring. By limiting our analysis to the duration of an economy-wide shock across two emerging economies, we are able to evaluate the effects of a sharp economic shock on the immediate restructuring firms undertake within stable institutional environments, across economies with different institutional structures. It is important for strategy research to focus on economy-wide shocks for two reasons. First, economy-wide shocks differ from localized industry- or firm-specific shocks in having different causes, broader effects and more severe consequences (Corsetti et al., 1999; Hahm and Mishkin, 2000; Kawai, 2000; Reinhart and Rogoff, 2009; Singh and Yip, 2000; Suarez and Oliva, 2005). Hence, insights from localized shocks do not translate well to economy-wide shocks (Chakrabarti, 2009; Singh and Yip 2000; Suarez and Oliva, 2005). Second, as economy-wide shocks recur and spread more quickly across borders (Reinhart and Rogoff, 2009) firms survival and success will increasingly depend on their ability to navigate such shocks. In turn, firms' restructuring will influence how well countries fare in these economy-wide shocks. We draw primarily from institutional economics (North, 1990) and resource-based theory (Barney, 1991; Wernerfelt, 1984). Institutions are the set of interrelated rules and norms, and their enforcement characteristics that govern exchange (North, 1990). The institutional environment influences restructuring by establishing rules and norms, and providing or limiting resources that facilitate or constrain firm actions and outcomes. Resources are uncommon tangible or intangible entities that have the potential to provide competitive advantage (Barney, 1991). Resource-based theory (Barney, 1991; Wernerfelt, 1984) proposes that firm activities and performance depend on firm-specific availability of resources and capabilities to deploy these

5 4 resources. Resource availability, therefore, has the potential to influence restructuring and its outcomes. These two theoretical perspectives indicate that firms may differ in restructuring following an economy-wide shock because of varying access to resources and because the environment provides different pressures, constraints and support for restructuring. Empirically, we focus on firm restructuring in South Korea and Singapore following the major economic crisis that struck these countries in Major economy-wide shocks permit first-difference analyses of the effects of major environmental change on firm restructuring and performance, while substantially controlling for the evolution of institutions. Differences in institutional structures across South Korea and Singapore (Dent, 2002; Rodan, Hewison and Robison, 2006) permit evaluation of how institutions affect restructuring. Few studies have examined the joint impact of economy-wide shocks and institutional influences on restructuring. We make four main contributions. First, we contribute to the deepening of the organizational change and restructuring literatures (Bowman and Singh, 1990, 1993; Greenwood and Hinings, 1996; Kraatz and Zajac, 2001; Rajagopalan and Spreitzer, 1997) by advancing understanding of how firms react to economy-wide shocks and of the outcomes of their actions. In demonstrating that institutions enable and constrain organizational restructuring and its outcomes, we broaden the organizational change literature, which has not followed strategy researchers (e.g., Peng, 2003; Makhija, 2004) in paying attention to institutional influences. Second, we contribute to the institutional perspective as applied to organizations (Peng, 2002; 2003). While this perspective highlights the external contingencies that affect firms restructuring, it underplays inter-firm variation in restructuring. Our evaluation of the interaction of institutions and organizations in the context of an economic shock improves understanding of the multi-level mechanisms that generate restructuring. Third, we contribute to the literature on economic shocks, which focuses on macroeconomic ramifications of economy-wide shocks but does not adequately consider micro-economic actions or consequences. We show that evaluating microeconomic adaptation to macroeconomic shocks improves understanding of firm-level consequences and outcomes of economy-wide shocks. Finally, we pay attention to issues of endogeneity to account for the

6 5 possibility that heterogeneity in firm-specific motivation may lead to spurious associations between restructuring and performance. Beck, Brüderl and Woywode (2008) show that most studies in this field have failed to deal with this issue, producing potentially biased results. ECONOMY-WIDE SHOCKS, RESTRUCTURING AND EMBEDDEDNESS Economy-wide shocks Economy-wide shocks are an extreme form of environmental change, which Suarez and Oliva (2005) characterize as "avalanche change" because they are high in terms of amplitude, speed and scope of change but occur infrequently. Firms face significantly different environments during economy-wide shocks from those during localized shocks, with a key difference being the availability of resources to support restructuring. An economy-wide shock affects broad sectors of the economy simultaneously, causing a decline in economy-wide aggregate demand, which in turn hurts consumer and investor confidence, exacerbating the demand shock (Dwor-Frecaut, et al., 2000; Mishkin, 2006). Capital and other resources are typically in short supply and further restricted by the adoption of conservative policies by banks, industry bodies and regulators, because of increased uncertainty (Hahm and Mishkin, 2000; Reinhart and Rogoff, 2009). Severe economic conditions may also encourage these actors to modify norms and regulations, hindering the operations of institutions, markets and intermediaries (Hahm and Mishkin, 2000; Johnson and Mitton, 2003). Firms face reduced access to credit and financial markets, disruption of supply and distribution channels, reduced opportunities for mergers and acquisitions or asset changes, weaker demand, poorer performance and disrupted strategy (Dwor-Frecaut, et al., 2000; Singh and Yip, 2000). In contrast, firm- or industry-specific shocks typically result from supply disruptions, sudden increases in competition, demand changes or technological shocks that adversely affect some firms or an industry. Capital markets, other economic institutions, foreign trade and the broader economy are usually relatively unaffected by localized shocks, so that external resources and institutional support for firm restructuring largely remain available (Kawai, 2000). The "sub-prime" economy-wide shock of affected broad sectors of the U.S.

7 6 economy, caused a severe recession, disrupted capital and retail markets, and hurt firm performance. Many firms faced severe resource shortages which were compounded by reduced access to external sources of funds. Automobile manufacturers such as GM and Ford, for example, faced major declines in demand, revenue, profitability and liquidity, but could not raise funds because the economy-wide shock affected financial markets and other potential sources of resources. GM and Ford were forced into bankruptcy and were taken over by the government, which provided resources and support for restructuring. The major earthquake and Tsunami that struck Japan in 2011 is an example of a major but localized shock. This caused the Japanese economy to slow significantly and severely disrupted the operations and sales of many firms. However, most effects were localized geographically or to particular industries, so that the broader economy was not so severely affected as to prevent support for firms seeking resources or to restructure. Despite the recession, markets resumed close-to-normal operations within a short period, allowing firms in distressed industries to access traditional sources for resources to support restructuring. Table 1 summarizes key differences between economy-wide and localized shocks. In summary, economy-wide shocks are more likely to disrupt the operations of the economy, markets and intermediaries, to increase uncertainty, and to reduce firms' internal resources and their access to external resources. The severity of economy-wide shocks and the breadth of their impact increase the need for firms to restructure, while typically limiting firms' restructuring options to a subset of choices available during localized shocks or non-shock periods. ***Table 1 about here*** Restructuring Restructuring and other forms of organizational change incorporate a broad range of actions that can lead to firm expansion or contraction, financial restructuring, changes in the scope of activities, or changes to employment and internal structures. The key distinction between restructuring and other forms of organizational change lies in the motivation for restructuring a sudden, major and unforeseen shock to the external environment that threatens firm performance

8 7 and causes firms to undertake adaptation actions rather than in the specific types of actions that firms take. 1 For example, a firm may raise additional capital, sell a business or modify the structure of its divisions in reaction to a major external economic shock or because of a change in strategy; the former motivation indicates restructuring, while the latter represents other forms of change. How firms adapt to major external shocks has been studied from the perspective of general environmental change (e.g., Greenwood and Hinings, 1996; Kraatz and Zajac, 2001), major institutional change (e.g., Newman, 2000; Peng, 2003), de-regulation or privatization (e.g., Audia, Locke and Smith, 2000; Makhija, 2004) and technological change (e.g., Haveman, 1992; Mitchell and Singh, 1996). However, few studies have examined the impact of a major economic shock on restructuring (Suarez and Oliva, 2005). Firms that restructure typically aim for rapid improvements as major, adverse changes in the external environment threaten their performance and survival. This may require increased action to alter the firm's structure, resources or operations, or alternatively, reduced activity to preserve the firm's assets or operations, or to conserve resources. Restructuring therefore represents a discontinuity in a firm's pattern or momentum of regular change (Beck et al., 2008). Restructuring is costly, requiring firms to invest resources in undertaking transactions that alter the financial, operational and organizational structure of the firm or its base of assets and activities (Chakrabarti, 2009; Bowman and Singh, 1990, 1993; Mitchell and Singh, 1996). Even efforts to reduce the asset or cost structure of a firm may incur costs for disposing assets, layingoff employees, writing-off facilities, transferring resources and executing transactions. Restructuring is also difficult, requiring firms to have the managerial capabilities to undertake major changes while minimizing disruption to assets, operations, structures and people. The availability and need for resources is therefore an important influence on how firms restructure. How firms use and adapt their resources to changing environments is central to resource- 1 A range of overlapping and imprecisely distinguished constructs relate to restructuring (Suarez and Oliva, 2005). These include adaptation, change, downsizing, reconfiguration, reorganization, transformation and turnaround. Transformation (Newman, 2000) and turnaround (Chakrabarti, 2009) relate most closely to our concept of restructuring as externally-induced change, but imply and focus on successful outcomes (Newman, 2000). In contrast, our conceptualization focuses on firms' actions and accommodates successful and failed outcomes. We refer to firms' adaptation to causes other than major external shocks as "change and adaptation."

9 8 based theory (Barney, 1991; Wernerfelt, 1984). Firms are more likely to achieve strong performance through the stable deployment of resources, supported by capabilities that commit firms to consistent strategies (Barney, 1991). Rapid or radical restructuring that disrupts the deployment of resources, capabilities and routines may harm firm performance (Kraatz and Zajac, 2001; Newman 2000). More broadly, the strategic change literature warns that organizational and managerial disruption following restructuring may offset the benefits of improved resource alignment with the environment (Haveman, 1992; Rajagopalan and Spreitzer, 1997). Restructuring thus poses a dilemma: firms that do not restructure in response to major environmental change risk poorer performance from misalignment, while firms that restructure bear the costs of disruption following major internal change. Three broad conclusions from the organizational change and restructuring literature are: (1) Restructuring is difficult and costly. (2) Complex combinations of organizational resources and external factors create heterogeneity in firms' ability and willingness to restructure, and in the outcomes of restructuring. (3) Little research has examined the joint impact of economy-wide shocks and the institutional environment on restructuring; most studies examine firms within single countries, removing institutional variation. Institutional Environments and Embeddedness Institutional economics (North, 1990; Peng, 2002; 2003) explains that the institutional environment shapes firms' options, choices, behavior and performance. A key insight is that the institutional structure significantly influences how firms organize and perform by specifying the rules, constraints and incentives for doing business. The sociological tradition of institutional theory (Pfeffer and Salancik, 1978) offers a complementary prediction, that as firms depend on the environment within which they are embedded for resources, firm choices are enabled or constrained by the environment. Firms that align with the institutional environment are rewarded with improved performance. The institutional environment can affect restructuring in three ways. First, institutional structures establish the normative contexts that define acceptable economic behavior and

10 9 performance, and determine the general incentive structures and constraints within an economy (North, 1990; Peng, 2003; Whitley, 1999). More developed institutional environments, particularly markets for corporate control, impose greater pressures for performance by offering stronger incentives, prescribing clearer rules and norms, and providing more reliable valuation of firms' performance and prospects (Chakrabarti, Vidal and Mitchell, 2011; Mishkin, 2006). Institutional ambiguity, which often characterizes less developed institutional environments, creates uncertainty about firms' status, prospects and options, and raises the transactions costs of restructuring activities, hindering restructuring. Second, component institutions and intermediaries of the institutional structure will affect the resources and support that facilitate or hinder restructuring and its outcomes (Chakrabarti et al., 2011; Makhija, 2004). Developed institutions and intermediaries are more effective at mobilizing resources and channelling them to firms, and at providing the support firms need to restructure. Support for restructuring includes, for example, rules and regulations to indicate available options; intermediaries to guide firms in selecting and undertaking these actions; access to markets for the sale or purchase of assets and the raising of financial and other resources; and guidelines and systems for managing human resource and other organizational changes. These mechanisms and intermediaries are more available and effective in more developed institutional environments (Khanna and Rivkin, 2001; Makhija, 2004; Peng 2003) Third, a firm s embeddedness within specific institutions can influence its restructuring by nesting it within a socio-economic context that can facilitate or constrain access to resources (Aoki, 2001; Newman, 2000) and buffer it from the need to restructure. A buffer is an intervening factor that protects an organization from environmental pressures (Aldrich, 1979). Institutional embeddedness refers to the extent to which a firm s decisions are constrained by its relationship with external constituents (Carney, 2004; Feenstra and Hamilton, 2006; Greenwood and Hinings, 1996), such as business groups, banks, politicians, and governments. These relationships may provide privileged access to information, financial loans and transfers, licenses, business contracts, protection from competition and other favors that buffer firms from market

11 10 and environmental pressures (Chang, 2003; Feenstra and Hamilton, 2006; Mishkin, 2006; Whitley, 1999) and allow them to avoid or limit restructuring. Collectively, these institutional influences will determine how the effects of an economywide shock are felt by firms, firms' propensity to restructure, the type of restructuring they undertake, and restructuring outcomes. The large and complex literatures on firm change and restructuring have paid limited attention to the impact of institutional structures on firm restructuring and its outcomes, particularly in the context of economy-wide shocks. HYPOTHESES Our examination of restructuring across institutional structures during an economy-wide shock relies on four theoretical building blocks: (1) Firms will restructure if the need to restructure exceeds their ability to withstand such pressures. (2) Relative to localized shocks, economy-wide shocks exert greater pressures on firms to restructure and reduce more greatly the resources that may buffer firms from external pressure to restructure. (3) Institutional environments influence restructuring, as more developed institutional structures exert greater pressures to restructure, provide greater resources and support for restructuring, and limit opportunities for buffering. (4) Institutional embeddedness moderates restructuring by providing resources that may buffer restructuring pressures. Hypotheses 1a and 1b: Incidence of restructuring An economy-wide shock radically alters economic and business environments, and leads to two key firm outcomes, weaker performance and reduced access to resources. While a decline in performance is likely to increase the incentive to restructure, access to internal and external resources may reduce the need to restructure. Firms are compelled to restructure only when both outcomes the incentive to restructure as well as the loss of resource buffers occur at the same time. These outcomes are more likely following an economy-wide shock than at other times (Reinhart and Rogoff, 2009; Singh and Yip, 2000). The severity of an economy-wide shock substantially restricts management s options and reduces ambiguity on the need to restructure (Audia et al., 2000; Chattopadhyay et al., 2001).

12 11 Severe economic conditions lead to actual or prospective performance decline, reduce the availability of internal resources and access to external resources, undermine strategy and operations, and increase the likelihood that firms will act to preserve or improve performance. An economy-wide shock also moderates the embeddedness that may allow firms to avoid restructuring by weakening ties to connected organizations and the resources they can provide. Hence, efficiency-maximizing considerations designed to improve performance are likely to drive firms to restructure during an economy-wide shock. However, restructuring will be constrained by the uncertainty accompanying a major shock, which may cause firms to resist change or to act conservatively in restructuring (Audia et al., 2000; Karim and Carroll, 2008; Staw, Sandelands and Dutton, 1981). Restructuring costs, resource constraints and high transactions costs in the midst of a major crisis will further hinder restructuring. Firms with high rates of change and adaptation prior to the shock may chose not to increase restructuring during the economy-wide shock but may reduce restructuring instead. The restructuring literature has focused on actions firms take during or after an economy-wide shock (e.g., Fisher et al., 2004; Suarez and Oliva, 2005) without adequately considering how prior change and adaptation may affect restructuring during it (Beck et al., 2008). Therefore, firms may increase or decrease their restructuring during an economy-wide shock depending on their need to restructure, their ability to overcome constraints on restructuring, and pre-shock levels of adaptation and change. As it is uncertain which effect will dominate, we make the baseline prediction that restructuring during an economy-wide shock will depart from prior rate of adaptation and change. Hypothesis 1a: Firm restructuring during an economy-wide shock will change significantly from change and adaptation prior to the shock. The institutional environment will influence how firms restructure during an economy-wide shock through the pressures imposed on firms to restructure, the resources and support firms can access to restructure, and the availability of buffers that may allow firms to avoid restructuring. Developed institutional structures have relatively elaborate formal rules and norms, more

13 12 effective enforcement and more sophisticated actors and intermediaries, all of which will transmit the effects of economy-wide shocks more directly to firms and impose greater pressures for restructuring. Markets and intermediaries will signal and transmit the adverse economic conditions more efficiently so that firms will face reduced demand, more constrained and costly borrowing, market-based and risk-adjusted valuations, and greater pressures from owners to restore performance (Mishkin, 2006). Firms will face greater normative pressures to install structures and undertake actions that conform to adverse economic conditions. More developed institutional structures can also potentially provide greater access to resources and support for restructuring (Chakrabarti et al., 2011). Institutions and intermediaries associated with more developed structures are likely to be less supportive of efforts to avoid restructuring and less likely to provide buffers to enable such efforts (Mishkin, 2006). In contrast, less developed institutional structures will impose fewer pressures to restructure, provide fewer resources and less support for restructuring, and will be less effective at preventing firms from using buffers to avoid restructuring. Inadequate rules and regulations and their poor enforcement, inadequate or missing intermediaries, information asymmetry and other institutional weaknesses also hinder restructuring in less developed institutional environments (Chakrabarti et al., 2011; Makhija 2004; Mishkin, 2006). These arguments suggest that firms in more developed institutional environments are more likely to increase restructuring during an economy-wide shock relative to firms in less developed institutional environments. However, these differences in institutional environments will also influence change and adaptation in non-shock periods. Hence, firms in more developed institutional environments are likely to undertake greater change and adaptation prior to the shock, and through this experience, improve routines and capabilities that will facilitate restructuring during an economy-wide shock. Firms in less developed institutional environments will undertake less adaptation and change in non-shock periods, and thus have less experience and weaker restructuring capabilities. Therefore, firms in more developed institutional environments will likely have stronger capabilities and support from the institutional environment for restructuring, while firms in less

14 13 developed institutional environments will have weaker capabilities and support for restructuring. However, firms in less developed institutional environments will suffer greater loss of buffers during an economy-wide shock because of disruption of non-market relationships. Though non-market relationships may be disrupted in all markets, firms in less developed environments are more reliant on non-market relationships for resources. Firms in less developed institutional environments also have greater scope to increase restructuring during an economywide shock because of relatively low levels of pre-shock change and adaptation. On balance, we predict that firms in less developed institutional environments are more likely to increase restructuring when an economy-wide shock strikes. Hypothesis 1b: The less developed the institutional environment, the greater the likelihood that firms will increase restructuring from pre-shock change and adaptation when an economy-wide shock strikes. We expect firms to undertake a broad range of restructuring actions, contingent on the interaction of firm and institutional characteristics. Bowman and Singh (1990, 1993) propose a strategic conceptualization that classifies restructuring actions into three categories. Financial restructuring refers to significant changes to a firm s capital structure, such as the infusion of debt, leveraged buyouts, stock repurchases or injection of funds. Portfolio restructuring involves significant change to the mix of assets a firm owns or to its scope of business. Organizational restructuring consists of significant structural changes such as realignment of processes, structures and operations, or changes in ownership, management and employment. In Table 2 we explore how key components of the institutional structure may constrain or enable financial, portfolio and organizational restructuring, demonstrating the value of examining the impact of institutional components on firm restructuring. This analysis shows that the institutional structure may constrain restructuring through multiple mechanisms, many of which follow from increased risk and uncertainty, weaker economic conditions and markets, and reduced resource availability. However, institutional structures and adverse conditions may also motivate and facilitate some types of restructuring. In light of this ambiguity, we do not hypothesize on the specific types of restructuring firms undertake but evaluate these empirically.

15 14 ***Table 2 about here*** Who will restructure more? Hypotheses 2a and 2b: Business group affiliation We reinforce our focus on institutional differences by evaluating the embeddedness of firms into stable institutions within each country, identifying business group membership as a key characteristic. Business groups are a network form of organization comprising legally independent firms with strong financial and administrative ties (Chang, 2006; Khanna and Rivkin, 2001). Business group affiliation is associated with central coordination, internal trading and sharing of resources, potentially greater access to external resources, greater embeddedness and restricted firm flexibility (Chang, 2003; Feenstra and Hamilton, 2006; Whitley, 1999). The business groups literature has not investigated how group affiliation influences restructuring, except in broad terms (Chang, 2003; 2006). Group affiliation can reduce restructuring in two ways. First, group affiliated firms have greater access to group-wide resources, which may allow them to avoid restructuring. Intragroup buyer-supplier relationships, interlocking directors, mutual debt guarantees, direct transfer of resources and cross-shareholdings are some of the mechanisms that allow resource sharing within a group (Chang, 2003; Feenstra and Hamilton, 2006; Khanna and Rivkin, 2001). Chakrabarti et al. (2007) found that group-affiliated firms gained from resource transfers, particularly in less developed economies. Ahmadjian and Robbins (2005) found that firms more integrated into the Japanese business system through higher levels of shareholdings by financial institutions had better access to financing and lenders of last resort, making them less susceptible to restructuring pressures from foreign shareholders. Carney (2004) argues that business groups resist change to avoid upsetting their internal and external ties and relationships. Second, group-affiliated firms are more institutionally-embedded than non-group firms, suggesting that group-affiliated firms may have less incentive to restructure. Institutional and market weaknesses in emerging or transitional economies allow business groups and their leaders to develop relationships with dominant institutions that provide access to resources and

16 15 buffers (Chang, 2003; Feenstra and Hamilton, 2006; Johnson and Mitton, 2003; Mishkin, 2006; Peng, 2003). Business groups' economic importance in less developed institutional environments reinforces their privileged access to resources (Feenstra and Hamilton, 2006; Khanna and Rivkin, 2001; Tsui-Auch, 2006) particularly in environments where connections to politicians and bureaucrats can facilitate resource access (Chang, 2006; Dent, 2002; Whitley, 1999). Johnson and Mitton (2003) found that politically connected firms received additional resources following an economy-wide shock, enabling them to limit restructuring. Baek, Kang and Park (2004) and Mishkin (2006) report that business groups in South Korea enjoyed favored access to resources during an economic crisis. However, an economy-wide shock will weaken external ties and the buffering these ties provide business groups. An economy-wide shock will affect institutions, markets, intermediaries and other actors, and disrupt the resources and support that they can provide to connected business groups (Mishkin, 2006). In turn, the disruption suffered by groups will limit the current or future resources they can reciprocate to these intermediaries and actors, which will weaken ties and resource transfers. This suggests that an economy-wide shock will weaken the buffers that may shield group affiliates from restructuring. Though an economy-wide shock will weaken buffers, business groups are likely to have greater access to resources relative to non-group firms because of internal transfers and because they are more embedded, as discussed above. In addition, business groups may enjoy greater resource support during an economy-wide shock because they have disproportionately important economic impact. Chang (2003) and Mishkin (2006) report that business groups in South Korea were perceived to be "too big to fail" and received disproportionate support during an economywide shock, while Tsui-Auch (2006) indicates that government-linked groups in Singapore also gained from their association with the government. Therefore, group affiliates may be less inclined to restructure than non-group firms because they are more embedded within networks of internal and external relationships that buffer them from pressures to restructure. Hypothesis 2a: Group affiliated firms will restructure less than non-group firms during an

17 16 economy-wide shock. The extent to which group affiliation may buffer firm restructuring depends on the development of the institutional structure. Developed institutional structures, particularly well developed markets for corporate control, may make it more difficult for groups to cushion poor performing affiliates (Kawai, 2000; Mishkin, 2006). These institutional structures will impose greater pressures on groups to restructure and will be less compliant in providing resources that may defer restructuring (Chakrabarti, 2009; Makhija, 2004), thereby reducing the inertial effects of resource sharing and institutional embeddedness on group-affiliated firms' restructuring. For example, group-affiliated firms are more likely to lose their privileged access to external resources following an economy-wide shock when capital markets are more developed. Stock markets are more likely to rate poorly, group affiliates that fail to restructure appropriately. Banks may be less willing to provide new loans to group-affiliated firms or may impose stringent conditions on such loans to limit resource diversion to more distressed firms within the group. These effects will be weaker in less developed institutional environments. For example, Chang (2003: 196) illustrates how business groups in South Korea avoided financial restructuring by artificially re-valuing their assets and by issuing equity to affiliated firms. Developed capital markets are less likely to accommodate such efforts to buffer (Mishkin, 2006). Following the arguments of Hypothesis 1b, group affiliates in less developed institutional environments will suffer greater loss of buffers during economy-wide shocks than groups in more developed institutional environments, while being more reliant on these buffers. These firms will have greater scope for restructuring, because of lower levels pre-shock change and adaptation. We therefore expect group affiliates to have greater pressures, resources and support for restructuring in more developed institutional environments, and those in less developed institutional environment to have greater need for restructuring because of the loss of buffers and greater scope for increasing restructuring. As the loss of buffers may be critical, we predict that group affiliates will increase restructuring more relative to non-group firms in less developed environments, than group affiliates will relative to non-group firms in more developed

18 17 institutional environments. 2 Therefore, we expect that the moderating effects of group-affiliation on restructuring to be weaker in less developed institutional environments. Hypothesis 2b: The less developed the institutional environment, the weaker the negative impact of group affiliation on restructuring during an economy-wide shock. In developing Hypothesis 1b, we argued that firms in more developed institutional environments would have developed greater restructuring capabilities from restructuring more in the non-shock period. This argument also applies to Hypothesis 2b. We therefore control for firms' propensity to restructure in our empirical analysis. Hypotheses 3a and 3b: Prior Performance Poor performance is an important motivator of restructuring (Bowman and Singh, 1990). Poor performance reduces the stock and flow of resources within an organization, prompts managers to recognize their firm's condition, and induces restructuring to conserve and raise additional resources. Kraatz and Zajac (2001) show that firms with greater resources are less likely to restructure because resources can protect firms from environmental pressures. Cheng and Kesner (1997) find that resource availability in the form of slack may make organizations more or less likely to respond to environmental change. However, poor performance may reduce the stock of internal resources to support restructuring, and may restrict access to external resources and support, which will hinder restructuring. On balance, the severity of economy-wide shocks will limit the options for poorly performing firms to defer restructuring. Therefore, we expect poor performance to lead to increased restructuring. Hypothesis 3a: Firms will restructure more during an economy-wide shock, the poorer their performance. Poor performance will pose fewer constraints if a firm has access to external resources that may buffer external pressures and allow restructuring to be avoided or delayed (Ahmadjian and Robbins 2005; Johnson and Mitten, 2003; Mishkin, 2006). Several studies discuss inertia from organizational constraints such as firm age but few have evaluated inertia driven by a firm s ties, 2 This is compatible with the view (Chang, 2003; Carney, 2004) that business groups resist change and restructuring, as our arguments are relative to non-group firms within institutional environments, not in absolute terms.

19 18 particularly in less developed institutional environments. Groups often value relationships and stable performance over superior financial returns (Lincoln, Gerlach and Ahmadjian, 1996; Whitley, 1999) and resist change that may upset their network of internal and external ties (Carney, 2004). As hypothesis 2 predicts, firms affiliated with business groups enjoy greater access to internal and external resources, which may buffer them from the pressures of poor performance relative to non-group firms. At the same time, more developed institutional environments will be less tolerant of under-performance and will impose greater pressures for improvement. Therefore, we expect group affiliation to weaken the effects of poor performance on restructuring, but that this moderation will be weaker with institutional development. Hypothesis 3b: The less developed the institutional environment, the weaker the negative association between performance and restructuring among group affiliates during an economy-wide shock. Hypotheses 4a, 4b and 4c: Outcomes of restructuring The central argument of the organizational change and restructuring literatures is that improving alignment with altered environments improves firm performance (e.g. Bruton, Ahlstrom and Wan, 2003; Haveman, 1992; Kraatz and Zajac, 2001; Suarez and Oliva, 2005). Several studies report that restructuring following a major economic crisis improves firm performance, though not consistently or for all firms (Chakrabarti, 2009; Claessens et al., 1998; Fisher et al., 2004). Institutional structures influence the outcomes of restructuring during an economy-wide shock through pressures to restore performance, providing resources either for restructuring or for buffering against it, and by providing varying degrees of support for restructuring. More developed institutional environments will provide relatively greater pressures, resources and support for restructuring. In economies where markets for corporate control are effective and access to low-cost or non-market sources of funds is limited, firms will have fewer opportunities for engaging in restructuring that is not performance oriented, so restructuring is more likely to improve performance (Fisher et al., 2004; Makhija, 2004). Therefore, while we expect restructuring to improve performance in general, the combination of greater pressures, greater resources and support and weaker buffers in more developed environments will lead to more

20 19 positive restructuring outcomes than in less developed institutional environments. Hypothesis 4a: Restructuring during an economy wide shock is positively associated with firm performance. Hypothesis 4b: The less developed the institutional environment, the weaker the impact of restructuring on firm performance during an economy wide shock. Group affiliates enjoy the advantage of access to within-group resources, and greater access to external resources than non-group firms. However, these internal and external sources and their ties to business groups will weaken during an economy-wide shock, potentially limiting their resource advantage over non-group firms. Evidence from the Asian crisis of 1997 indicates that the drying up of bank credit was a critical factor that hindered operations and influenced restructuring for many business groups (Chang, 2003; Mishkin, 2006). Business groups have more complex structures and operations, and stronger integration processes and links (Feenstra and Hamilton, 2006; Whitley, 1999), which may make restructuring more costly and its outcomes less positive (Greenwood and Hinings, 1996). Chakrabarti et al. (2007) found that business groups suffered greater performance reversals when economic conditions changed significantly. We therefore expect that group affiliates will achieve poorer outcomes from restructuring than non-group firms. Following our previous arguments, we expect that greater pressures, resources and support make it more likely that group affiliates in more developed institutional environments will achieve positive outcomes from restructuring. Group affiliates in less developed institutional environments, facing weaker pressures for performance, weaker access to resources and support, and greater loss of buffers, are less likely to achieve positive outcomes from restructuring. Therefore, we expect group affiliation to weaken the positive impact of restructuring on performance, particularly in less developed institutional environments. Hypothesis 4c: The less developed the institutional environment, the weaker the association between restructuring and performance among group affiliates during an economy-wide shock. In summary, we hypothesize that firms will change their restructuring pattern when an economywide shock strikes (H1a) with greater likelihood that they will increase restructuring in less

21 20 developed institutional environments (H1b). We then predict that during the economy-wide shock, group affiliates will restructure less than non-group firms (H2a) though the negative effect of group affiliation will be weaker in less developed institutional environments (H2b). We expect poor performance to increase restructuring during the shock (H3a) but that group affiliation will weaken this relationship particularly in less developed environments (H3b). Finally, we predict that restructuring improves firm performance (H4a) but that this effect will be weaker in less developed institutional environments (H4b) and that group affiliation will also weaken this relationship, particularly in less developed institutional environments (H4c). DATA, VARIABLES AND METHODS We locate our study in Singapore and South Korea between 1995 and The Asian Economic Crisis struck these economies in late-1997, causing both economies to suffer their deepest recessions for decades (Corsetti et al., 1999; Dwor-Frecaut et al., 2000; Kawai, 2000). Appendix 1 provides economic data that demonstrates the impact of the crisis. The severity of the shock imposed immediate pressures on firms to respond to the crisis and on governments to restore economic growth. However, the institutional structures in South Korea and Singapore did not change during the shock and despite pressures for reform, evolved gradually in following years (Carney, 2004; Whitley, 1999). As we evaluate restructuring during an economy-wide shock, we focus our analysis on the period immediately before and during the shock, to eliminate substantial institutional change. Reinhart and Rogoff (2009: 236) view the crisis in South Korea as lasting two years, which also applies to Singapore, as its economy had made a strong recovery by 2000 (Rodan et al., 2006). Therefore, we treat 1996 and 1997 as pre-shock years, and 1998 and 1999 as shock years. Institutional Structures: South Korea and Singapore A series of studies (e.g., Chang, 2006; Dent, 2002; Feenstra and Hamilton, 2006; Huff, 1995; Rodan et al., 2006, Whitley, 1999) substantiate the view that Singapore and South Korea had substantially different institutional structures during our study period, with several (e.g. Aron, 2000; La Porta et al., 1998; Chakrabarti et al., 2011) regarding Singapore as more institutionally

22 21 developed. Appendix 1 shows that these countries had substantially different economic structures, while Appendix 2 evaluates their key institutional components. We conclude that Singapore is more developed than South Korea in terms of the business-oriented institutional environment. A major source of the differences between South Korea and Singapore was the openness of the economies. Singapore's economy was open and highly integrated with the global economy, and had few constraints on flows of capital, goods, firms and people. Foreign trade represented more than 300% of Singapore s GDP, among the highest levels globally, and many times South Korea's levels. UNCTAD (2000: 25) rated Singapore second (with a score of 36.2) and Korea last (score: <5) on its Transnationality Index of 30 developing countries. MNCs had a very large presence in Singapore, with more than 24,000 affiliates present in the country in 1997 (UNCTAD, 2000), many times the number in South Korea. The Singapore government s active management of the economy created a relatively sophisticated banking and finance sector, and relatively developed business-related institutions. In contrast, South Korea had a relatively closed domestic economy, a history of resisting foreign influences, and limited foreign capital, goods, firms and people. High levels of global integration can cause domestic institutions to adopt characteristics of and become partly embedded in global institutions (Whitley, 1999). Singapore's small and open economy imported or adopted many global and Western business systems and institutions, so that its institutional structure resembled those of developed nations in many respects (Dent, 2002: ). Singapore's long history as an English colony and its immaturity as a nation-state reinforced the isomorphic tendencies of its institutions. South Korea's institutions were more idiosyncratic, and less aligned with and embedded in global business systems and institutions (Dent, 2002; Feenstra and Hamilton, 2006; Whitley, 1999). South Korea's government and institutions did not adapt effectively to the economy's progress and increasing globalization, so that the institutional structure in the 1980s and 1990s lagged behind the development of the economy (Chang, 2003: 35-37). We draw two conclusions from this overview. First, Singapore and South Korea had