Corporate Turnaround and Corporate Governance: An Empirical Investigation of the Role of Ownership Structure in Corporate Turnarounds in Western European Firms

Anders Vest Hansen

Student thesis: Master thesis


In this thesis, I argue that the research of corporate turnarounds needs to look beyond the classical elements in turnaround situations and instead look at governance functions in a firm to fully understand the phenomenon and understand why some firms continue to underperform. Therefore, I will empirically examine the relationship between ownership structure and corporate turnaround performance and outcome. In order to examine the suggested relationship, I employ a comprehensive sample procedure to construct a heterogeneous panel dataset consisting of Western European firms experiencing a genuine 6-year turnaround situation within the period from 1995 to 2010. I use fixed effect and dynamic fixed effect panel models to test the relation between ownership structure and turnaround performance, while I use logistic fixed effect model to test whether turnaround and non-turnaround firms have significantly different ownership structures. In the empirical testing, I also test the effect of both cost and asset retrenchment. My results indicate that ownership concentration and turnaround performance and outcome are not significantly related. I find dominant blockholdings to be weakly significant and negatively related to turnarounds, while the entry of new blockholders and large shifts in the ownership structure exert an insignificant effect on turnaround performance and outcome. Turnaround performance is not affected by firm size, while turnaround firms are significantly larger compared to non-turnaround firms. Although cost and asset retrenchment has a pronounced position in the turnaround literature as the essential turnaround measure, I find cost retrenchment to exert no influence on turnarounds. I find a negative relation between asset retrenchment and turnaround performance and outcome, which is contrary to the advocated effect. Generally, the findings are plagued by potential econometric issues, in which case the findings are only suggestive. The results indicate the presence of endogeneity issues between turnaround performance and the examined factors. In particular, the results indicate potential endogeneity of ownership concentration. In general, my thesis attempts to advance the understanding of governance arrangements in the turnaround process by suggesting that unbalanced governance functions may be a constraining factor in the turnaround effort. The results indicate that ownership structure is not an effective governance mechanism in turnaround situations, thereby suggesting that governance mechanisms have varying importance depending on the stage of a firm’s life-cycle.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2012
Number of pages113