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Kulwant Singh Department of Strategy and Policy National University of Singapore 15 Kent Ridge Drive Singapore 119245 Tel: (65) 6874 3174 Fax: (65) 6779 5059 Email: Ishtiaq P. Mahmood Department of Strategy and Policy National University of Singapore 15 Kent Ridge Drive Singapore 119245 Phone: (65) 6516 6387 Fax: (65) 6779 5059 E-mail:

Jinyan Zhu Triumpus capital 15 Scotts Road #08-13 Singapore 228218 Tel: (65) 6874 3075 Fax: (65) 6779 5059 Email:

An earlier version of this paper was presented at the Business Policy and Strategy Division, Academy of Management Meetings in August 2003. 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.


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.

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

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

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 1997. 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

5 possibility that heterogeneity in firm-specific motivation may lead to spurious associations between restructuring and performance. Beck, Brderl 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 2007-2008 affected broad sectors of the U.S.

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

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 resource1

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."

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

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 firms 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 firms 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

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 managements options and reduces ambiguity on the need to restructure (Audia et al., 2000; Chattopadhyay et al., 2001).

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

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

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 firms 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.

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

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

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

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 firms ties,

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.

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

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

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 1999. 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

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 Singapores 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 governments 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: 121-123). 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

22 significantly different institutional structures, allowing evaluation of the impact of institutional differences. Second, Singapore had a more developed business-related institutional structure embedded in global institutions, allowing evaluation of the impact of institutional development. Data Our sample comprised all manufacturing firms listed on the Singapore and South Korea exchanges in 1995, as reported in the Worldscope Database (November 2000 edition). We excluded inactive firms and those whose principle business was outside manufacturing, which resulted in samples of 125 firms in South Korea and 73 in Singapore. From these, 114 South Korea and 66 Singapore firms existed in 1999, and formed our final sample.3 We obtained firm data from the Worldscope Database. The Corporate Handbook for Singapore, The Korea Firm Yearbook and company websites provided additional data. Variables Restructuring. Our dependent variable for Hypotheses 1 to 3 is the count of restructuring actions undertaken by each firm. We incorporated the quadratic term for restructuring, as gains from improved alignment may be offset by the costs of disruption at high levels of restructuring. There is no ready source of data on restructuring as databases and reporting services do not capture such complex non-financial information. We therefore followed Kang and Shivdasani (1997) and Nixon et al. (2004) and relied on articles published in newspapers for restructuring information. The search centered on each firm in our sample and was conducted on the Dow Jones Interactive database.4 This method of data collection assumes that media sources report business news systematically. This is reasonable as restructuring by listed firms attracts media attention.

We investigated all delistings between 1995 and 1999 to examine if any resulted from failed restructuring. Six delistings in South Korea were due to M&As within business groups and two to acquisitions by unrelated firms, while two were not M&A-related. We could not confirm the reasons for one delisting. For Singapore, four cases were within-corporation M&As, one firm was acquired in an unrelated M&A, and one delisting occurred for unknown reasons. Though some delistings may have been related to corporate changes, none appeared to result from firm-level restructuring. Further, as delistings are not a large part of our sample, we believe that survivor bias is not a significant problem for our study. Our procedure is consistent with Fisher et al. (2004). 4 For South Korea, this collection used reports from Korea Herald and Korea Times, the two leading English newspapers in the country. This search produced 2,664 articles of which 105 were repeat articles and 1,132 were unrelated to restructuring. We used a similar procedure for Singapore data, which utilized The Straits Times and Business Times, the only two English newspapers published in the country. The 2,505 articles on our sample were reduced to 1,027 by eliminating 118 repeat articles and 1,360 articles unrelated to restructuring.

23 Consistency in reporting across sources within each country also suggested reliability of reporting. Finally, no other method allowed our grounded, large-sample, multi-year, detailed firm-level restructuring research design; this approach is useful but underutilized because of its difficulty (Van de Ven and Huber, 1990). Following Bowman and Singh (1990; 1993) we classified restructuring activities into portfolio, financial and organizational restructuring.5 Table 3 summarizes our restructuring data. ***Table 3 about here*** Performance. Measuring firm performance is a considerable challenge in rapidly changing environments. Accounting measures such as return on assets (ROA) suffer from significant lag effects because they rely on historical values that may not reflect current valuation in rapidly changing environments. Hence, ROA and related measures may not reliably reflect the outcomes of restructuring during an economy-wide shock. Market measures such as Tobin's q offer a more current assessment of performance. However, Tobin's q is a market-based assessment of performance that may provide a relatively pessimistic estimate of performance and restructuring outcomes during an economy-wide shock because it encompasses systematic risk (Bentsen, 1985). Concerns about market efficiency arise in under-developed institutional environments, though these concerns also apply to accounting standards and measures. As restructuring primarily aims to improve firm performance in the short-term to overcome the threat of a major external change, we believe the advantage of a current estimation recommends the use of Tobin's q as a measure of performance. Other studies of restructuring during an economy-wide shock also adopt Tobin's q (e.g. Baek et al., 2004). We employ a modified version of Tobins q as the dependent variable for the tests of Hypotheses 4a, 4b and 4c. We measure Tobins q as the ratio of firm value (total market value of equity and debt) to replacement value of assets. As replacement value of assets and market value of debt were not available, we divided market value of equity and book value of liabilities by

We tested the reliability of our classification by having four coders assign a sample of 40 restructuring actions into the three categories of restructuring. The four coders agreed perfectly with our classification of 34 of 40 items and three coders agreed on a further five items, suggesting substantial reliability.

24 book value of assets as an approximation of Tobins q. The value of equity was based on closing prices on the last trading day of each year. Hypotheses 3a and 3b require a measure of performance to evaluate if poor performance influences restructuring. We used ROA for this purpose. ROA's lagged measure of performance is an advantage in this regard, as realized poor performance is more likely to drive restructuring. We include ROA's quadratic term to detect the impact of extremes in performance, as might occur during an economy-wide shock. Group affiliation. An important difference between Singapore and South Korea was the nature of business groups. In South Korea, large family-owned business groups (chaebols) dominated the economy (Chang, 2003; Feenstra and Hamilton, 2006; Whitley, 1999). In Singapore, government linked corporations (GLCs) were the dominant business group form (Chakrabarti et al., 2007; Singh and Ang, 1999; Tsui-Auch, 2006), though there were some family-owned groups. We established group affiliation by referring to stock exchange handbooks and to selfreported associations on company websites. We confirmed these affiliations by referring to data on Singapore and South Korea groups provided by authors of published studies. An indicator variable noted group affiliated firms. Control variables. We used the logarithm of total assets to measure firm size. We used assets as this is reasonable measure for manufacturing firms and because restructuring often relates to asset changes. We used the current ratio (current assets/total assets) to measure liquidity and debt ratio (debts/total assets) to measure leverage. These three controls measure resource availability, which influences restructuring (Kraatz and Zajac, 2001). Foreign sales ratio (foreign sales/total sales) accounted for possible mitigating effects of foreign operations during the shock. Firm age may affect ability to change (Kelly and Amburgey, 1991; Tan and See, 2004), which we measured in years from time of formation. As our sample comprises only manufacturing firms, we used technology intensity indicators (OECD, 1999) to classify firms as high, medium-high, medium-low and low in technology intensity. All variables other than firm age and indicators were lagged one year. Table 4 provides summary statistics.

25 *** Table 4 about here*** Methods The count of restructuring actions in total or within each category is the dependent variable for the tests of Hypotheses 1 to 3. Poisson regression and negative binomial regression, a variant of the former that accounts for heteroscedasticity, are standard models for count-based data. However, standard Poisson or negative binomial models that handle zero and non-zero outcomes in one model cannot adequately describe data when there is a preponderance of zeros, as is the case for our study because many firms did not restructure. Consequently, we adopted the zeroinflated Poisson (ZIP) regression model, which is effective at handling the preponderance of non-events in the dependent variable (Wooldridge, 1999). This model offers the additional advantage of evaluating unobserved heterogeneity by distinguishing firms that restructure from those that do not. As too few events prevented convergence of some ZIP models of restructuring within categories, we primarily report negative binomial regression results. Comparisons with ZIP models that converged suggest broadly similar results. For the test of Hypothesis 4 on the outcomes of restructuring, we used generalized estimating equations (GEE). GEE accounts for firm heterogeneity and autocorrelation due to repeated measurements of the same firms by estimating the correlation structure of error terms. Firm-specific heterogeneity, such as in resource availability or restructuring capabilities, may make some firms more willing to restructure and may affect restructuring outcomes. The restructuring literature has not systematically evaluated the impact of such endogeneity (Beck et al., 2008). Hypotheses 2 and 3 evaluate the likelihood of restructuring during the economy-wide shock, which may be influenced by firms' propensity to restructure. For Hypothesis 4, it is possible that restructuring affects performance while sub-optimal performance induces firms to restructure (as predicted by Hypothesis 3), making it difficult to distinguish cause and effect. To control for factors that may cause firms to restructure and that may also affect performance, we employed a two-stage estimation procedure for the evaluation of Hypotheses 2, 3 and 4. In the first stage, we used probit regression to estimate the likelihood of restructuring (restructuring

26 predictor) with the following variables: firm sales (log value, lagged one year); market capitalization (log value, measured at the start of the year); foreign sales (lagged one year); ownership concentration of the largest owner (%, lagged one year); two indicator variables to note when the largest owner was a bank or family; and an indicator to distinguish Singapore and South Korea firms. Sales, market capitalization and foreign sales controlled for performance and resources. Concentration and ownership variables controlled for owners' influence on resource access and restructuring (Baek et al., 2004; Makhija, 2004). Though these variables do not include all influences on restructuring, they broadly control for resource availability, which is likely to influence propensity to restructure. We estimated separate models for financial, portfolio, organizational and total restructuring. The second stage used negative binomial to evaluate restructuring (Hypotheses 2 and 3) and GEE models to evaluate the impact of restructuring on performance (Hypothesis 4). RESULTS Restructuring: A shock effect? Table 5 presents results of the test of Hypothesis 1a, which show that total restructuring did not change during the shock (Model 1, b = -0.099, n.s.). However, financial restructuring increased (b = 1.346, p < 0.001), particularly for Singapore firms (b=1.870, p < 0.01). *** Table 5 about here*** Table 6 expands the test of Hypothesis 1a by evaluating restructuring within country samples. Results show a striking difference in restructuring across countries. Singapore firms significantly decreased total restructuring (b = -0.352, p < 0.01) driven by the reduction in portfolio restructuring (b = -0.495, p < 0.001), while South Korea firms increased all forms of restructuring from pre-shock levels. These significant changes in restructuring support Hypothesis 1a. The significant increase in restructuring in South Korea and decrease in Singapore support Hypothesis 1b, which predicted greater likelihood of increased restructuring in less developed institutional environments. Table 3 shows that South Korea firms had significantly lower levels of pre-shock change and adaptation than Singapore firms (p < 0.001),

27 and also lower levels of restructuring during the shock (p < 0.05). *** Table 6 about here*** These results show that an economy-wide shock significantly impacts restructuring, but that firms may increase or decrease restructuring relative to pre-shock levels of change and adaption. The contrast in restructuring across the two economies indicates the importance of country factors, consistent with our emphasis on institutional differences, and the hazards of pooling country samples. We therefore conduct separate evaluations for all subsequent analyses. Who restructures more? Hypothesis 2a predicts that group affiliates will restructure less than non-group firms during an economy-wide shock. Table 7 evaluates restructuring for the shock period only, and shows that group affiliates in Singapore did not differ in restructuring from non-group firms. In contrast, group affiliates in South Korea restructured more than non-group firms across all categories of restructuring. These results do not support Hypothesis 2a but are consistent with Hypothesis 2b's prediction that group affiliation in less developed environments will restrict restructuring less than in more developed environments. Hypothesis 2a relies partly on the argument that group affiliates restructure less because of greater support from being "too big to fail." We repeated our analysis for the largest 25% of firms by assets, sales and market capitalization, for whom the "too big to fail" effect would be strongest. Singapore results were unchanged but the positive association between group affiliation and restructuring in South Korea was lost for all three measures, indicating large group affiliates restructured less. This is consistent with buffering helping large group affiliates avoid restructuring in less developed institutional environments. *** Table 7 about here*** Table 7 also reports results of the tests of Hypothesis 3a, which predicts that poor performance will increase restructuring. ROA was negatively related to restructuring for Singapore firms, except for organizational restructuring, but was not associated with restructuring for South Korea firms. This result shows that poor performance drives restructuring during an economy-wide shock in Singapore, supporting Hypothesis 3a. ROA2 was positively

28 associated with total and financial restructuring in Singapore, indicating that strong firms restructure more during shocks, possibly to exploit opportunities. Hypothesis 3b predicts a weaker relationship between poor performance and restructuring among group affiliates in less developed environments during the shock. Results in Table 7 show non-significant Group*ROA for Singapore firms, indicating that group affiliates did not differ from non-group firms. Group*ROA was negative for South Korea firms except for portfolio restructuring, showing that poor performance drove restructuring among group affiliates more than for non-group firms in South Korea. The positive Group*ROA2 coefficients for South Korea indicates that very strongly performing group affiliates were more likely to restructure. These results do not consistently support Hypothesis 3b. Results in Table 7 indicate that Singapore firms restructure primarily to correct performance, but that group affiliation drives restructuring in South Korea; among these South Korea group affiliates, both poor performance and very strong performance increases restructuring. Outcomes of restructuring Table 8 presents results of the tests of Hypotheses 4a, 4b and 4c, on the impact of restructuring on performance. Financial restructuring was associated with improved Tobin's q for Singapore firms, as were high levels (Restructuring2) of total and portfolio restructuring. Restructuring was positively associated with Tobin's q in South Korea, except for portfolio restructuring. These results are consistent with the view that restructuring improves performance, though greater restructuring may be required to improve performance in more developed institutional environments. These results support Hypothesis 4a. Meanwhile, high levels of total restructuring in South Korea and of financial restructuring in both economies hurt performance. Intensive financial restructuring in the midst of an economy-wide shock or intensive restructuring in less developed institutional environments, where resources and support for restructuring are inadequate, may cause too much disruption and hurt performance. Hypothesis 4b predicted weaker outcomes from restructuring in less developed institutional environments. Results only support this prediction for high levels of restructuring. It is possible

29 lower levels of pre-shock change provides greater scope for improvement in less developed institutional environments, but that these environments do not provide adequate resources and support to allow positive outcomes when restructuring is intensive. Hypothesis 4c predicted weaker outcomes from restructuring for group affiliates in less developed institutional environments. Results indicate that group affiliates gain less than non-group firms from organizational restructuring in Singapore and from financial restructuring in South Korea, but otherwise achieved similar outcomes. These results do not support Hypothesis 4c. *** Table 8 about here*** The restructuring predictor was significant for Singapore but not for South Korea in Table 8, indicating that common factors predicted the propensity to restructure and the outcomes of restructuring in Singapore. Two possible factors are that Singapore firms had greater capabilities that facilitate restructuring and improve firm performance, and that Singapore's more developed institutional environment influenced restructuring and its outcomes. Both factors are consistent with our focus on firm and institutional resources as key drivers of restructuring and its outcomes. We repeated our analysis without the restructuring predictor variable and found results to be broadly consistent but with stronger coefficients. This indicates that failing to control for endogeneity may result in over-estimation of the benefits of restructuring. Control variables did not consistently influence restructuring or its outcomes, though we find some consistencies within countries. The absence of consistent effects among control variables suggests that restructuring and its outcomes during an economy-wide shock are contingent on firm-specific factors. In summary, we find that Singapore firms undertook greater restructuring during the economy-wide shock than South Korea firms but reduced restructuring during the shock, while South Korea firms increased restructuring during the shock. Poor performance drove restructuring during the shock for Singapore firms ahead of other characteristics such as group affiliation. In contrast, group affiliation was the key determinant of restructuring before and during the shock in South Korea, with performance only driving restructuring for group affiliates.

30 These results indicate that institutional structures and embeddedness within these structures influence firm restructuring during an economy-wide shock. Finally, we find that restructuring improved performance across institutional environments, though more intensive restructuring was required in more developed institutional environments. These results are consistent with the complexity of the construct of restructuring and with the challenges and uncertainty faced by firms during economy-wide shocks. More generally, results indicate the importance of firmspecific and institutional influences on restructuring. Though results do not consistently support hypotheses, they provide interesting insights into restructuring and its outcomes. Robustness tests We conducted several tests to evaluate the sensitivity of results. First, we evaluated alternate measures of key variables, using return on invested capital instead of ROA, sales instead of assets, and the quick ratio instead of the current ratio. Results were largely unchanged, though with some changes in significance levels. Second, we re-tested Hypotheses 1a and 1b using various combinations of one and two-year durations for the pre and shock periods, but found results to be stable. Third, we replaced Tobin's q with year-end market capitalization to measure firm performance for the test of Hypothesis 4. As our version of Tobin's q utilizes book values of assets and liabilities, it is a less sensitive measure of performance than market capitalization. We found that all forms of restructuring in Singapore were positively related to market capitalization but that none were in South Korea. These findings are consistent with Hypothesis 4b's prediction of more positive outcomes from restructuring in more developed environments. DISCUSSION AND CONCLUSIONS We investigate firm restructuring and its consequences following an economy-wide shock, focusing in particular on embeddedness within institutional environments and institutional differences across economies. A general conclusion is that firms change their pattern of restructuring during an economy-wide shock, rather than necessarily increasing restructuring, and that under severe economic conditions, restructuring does not offer a direct path to performance improvement. Firms in a more developed institutional environments reduced

31 restructuring during the shock and improved their performance, while firms in a less developed institutional environment increased restructuring and also improved performance. Institutional environments also influenced whether poor performance or group affiliation affected restructuring. Our results contribute to three research streams. First, we contribute to the restructuring literature, extending it to two understudied contexts, economy-wide shocks and varying institutional environments. Investigating the joint effects of an economy-wide shock and institutional environments provides insights that may help resolve basic disagreements on firm restructuring. In showing that the interaction of firm and institutional characteristics affects restructuring and its outcomes, we demonstrate that current explanations of restructuring that focus largely on firm heterogeneity will benefit from incorporating the influences of institutional heterogeneity. The failure to evaluate the institutional environment and the extent of firms' embeddedness may partly explain existing contradictory results. For example, a study that only evaluated Singapore firms would have concluded that restructuring is disruptive, so that reducing it during a shock can improve performance, and that business groups do not matter. A similar study in South Korea would conclude that firms can significantly increase restructuring during a shock and improve their performance in the process, but that group affiliation is the key influence. By evaluating the impact of internal and external resources on restructuring, we help to integrate resource-based and institutional economics perspectives on the issue of firm restructuring. A second contribution comes from showing that failing to control for endogenous influences exaggerates the incidence and outcomes of restructuring, supporting the view (Beck et al., 2008) that previous studies may have reported biased results. Third, we contribute to the application of institutional economics to the study of organizations by demonstrating how variation in institutional environments can affect firm processes and performance. Detailed evaluation of components of the institutional structure and of their influence on firm phenomena will improve understanding of how the institutional environment can facilitate or hinder restructuring and its outcomes. Many strategy studies view institutions primarily as constraints and do not adequately

32 recognize their role in supporting and enhancing firm actions and performance. Relatively limited empirical strategy research has gone beyond broad conceptualization of institutional influences to evaluate specific impact. Greater development of middle range theory on institutional influences on strategic phenomena is required. Finally, we help to integrate research on economy-wide shocks and firm restructuring. The suddenness and severity of these shocks control for many factors that buffer change, permitting better isolation of externally induced restructuring and of its performance consequences. Economy-wide shocks are unusual in providing a context that imposes severe pressures on firms to restructure, while constraining firms' access to resources that may buffer such pressures. They are therefore particularly useful contexts for evaluating the impact of firm resources and dynamic capabilities. These shocks are also inherently interesting, offering the radical environmental change that strategy theory must address. The impact of economy-wide shocks on firms and the opportunity to study firms during such shocks is under-recognized in strategy research. Our study shows how micro-level restructuring affects firm performance, which collectively determines how economies adjust to macroeconomic shocks. This indicates the value of linking firm restructuring and economic recovery in future research and of the potential for theory explicitly linking intra-organization change with macroeconomic phenomena (Newman, 2000). As firm adaptation to economy-wide shocks influences the microeconomic resilience of economies, these findings offer important lessons for managers and policy makers. Several issues we do not address in this study suggest opportunities for future research. First, our contrast of institutional environments in two emerging economies controls differences across several dimensions. It would be interesting to contrast restructuring in an advanced institutional environment. It would also be useful to evaluate restructuring across economy-wide shocks to examine the impact of variation in these shocks along with variation in institutional environments. Examining sequential economy-wide shocks will allow evaluation of firm and institutional learning across shocks and identification of restructuring's longer-term outcomes.

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Table 1. Impact of economy-wide and local shocks on the business and economic environment Institution Capital markets Economy-wide shock There are substantial adverse movements in exchange rates, trade balances, debt, liquidity, investments and FDI, leading to reduced turnover and declining capital markets. New fund raising and refinancing severely reduced. Greater firm insolvency and failures reduce hiring, increase layoffs and create union-employer conflict. Industrial action may increase substantially. Increased management layoffs and board turnover may follow poorer firm performance. Declines in economic activity and confidence lead to substantially reduced demand and business activity across broad sectors of the economy. Firms suffer reduced turnover and profitability. There are increased levels of firm exit and failures, and reduced levels of product introductions and innovation. Risk and uncertainty increase. May be substantially affected, with changes to regulations relating to capital and financial markets, investments, employment, taxation and other business aspects. Some changes will aim to lower costs of doing business and increase flexibility for firms; others will protect key organizations and employees through increased regulation and greater constraints on firms and employers. The shock may be attributed to weaknesses in the states political and economic policies, and institutional structure. This may lead to significant changes to scope of government and business operations, foreign participation in the economy, structure of markets, legal institutions, and capital and financial market rules and regulations. Some of these changes may be imposed by international agencies. Substantial changes in the political environment may also lead to changes in leadership, political structures, authority of agents, and the structure of government finances. In extreme cases, governments and their agencies may intervene in businesses and industries for political or economic reasons. Major economic and other disruption may alter perspectives of appropriate government and external management of the economy, extent of market competition and regulation, openness to foreign firms and trade, power of unions and related issues. Trust in various actors and the status of businesses may be severely affected. Local shocks Capital markets and availability of resources generally not substantially altered, outside of the affected industry. Layoffs and union-employer conflict usually limited to affected industry and closely related industries. Board and management turnover may or may not increase. Localized slowdowns affect single or closely related industries but do not substantially affect the overall economy. Firms in the affected industry suffer significant slowdowns in activity, profitability and investments, leading to layoffs and firm failures. Shocks to particular industries or sectors usually do not affect legal or regulatory systems and typically do not lead to broad or major changes in the regulatory environment. Some changes may take place if the industry is viewed as being important for the economy or other industries. In most cases, there is no substantial impact on the political environment. Political intervention may occur only for selected industries viewed as having significant national security, political or economic impact.

Labor markets

Product markets

Legal and regulatory systems

State structure and political environment

Trust and authority relationships

In most cases, there are no substantial changes to the broader social-cultural environment.

Table 2. Impact of the institutional structure on constraining or facilitating restructuring during an economy-wide shock
Capital markets Financial Restructuring Constrain Restructuring - Uncertainty and risk reduce availability of funds and increase costs of funds - Shocks attributed to capital markets and related actors, constraining their role in restructuring Facilitate Restructuring - Macroeconomic easing increases funds for firms - Low market activity may create low cost opportunities Constrain Restructuring - Risk of industrial action hinders fund raising Facilitate Restructuring - Negative conditions may allow bundling of actions and major cleaning up of books - Union cooperation may allow non-traditional financial actions Constrain Restructuring - Lower valuations of firms and assets reduce the attractiveness of potential financial transactions Facilitate Restructuring - Lower prices and valuations may attract new funds and potential buyers Portfolio Restructuring Constrain Restructuring - Poorer market and economic conditions discourage buyers and reduce M&As - Difficulty and cost of fund raising may discourage costly restructuring and new investments Facilitate Restructuring - Lower activity reduces costs and increases bargain hunting - Distressed sellers are more willing to negotiate Constrain Restructuring - Substantial layoffs, plant closures and firm failures increase union resistance and discourages restructuring Facilitate Restructuring - Negative conditions may encourage unionemployer cooperation Constrain Restructuring - Decline in activity and disruption of supply and distribution chains hinder operations, reduce valuations and buyers - Poor conditions limit new investments and potential buyers or partners Facilitate Restructuring - Poor market conditions may lower prices and encourage buyers of plants and assets Organizational Restructuring Constrain Restructuring - Difficulty and cost of fund raising may discourage costly layoffs and other organizational changes Facilitate Restructuring - Difficult market conditions encourage consolidation within firms and industries - Poor market conditions may force senior leadership to make difficult leadership and HR changes

Labor markets

Constrain Restructuring - Actual or potential industrial action restricts labor-related changes Facilitate Restructuring - Severe conditions may encourage collective negotiations and arbitration that allow major restructuring Constrain Restructuring - Regulations introduced to protect workers may limit options for restructuring Facilitate Restructuring - Poor market conditions may motivate firms to increase restructuring

Product markets

Legal systems Constrain Restructuring - M&A and disclosure rules are difficult to comply with during a shock, limiting transactions - Efforts to correct perceived causes of crises often create new financial and capital constraints Facilitate Restructuring - Some regulations may be suspended or relaxed during the shock, to increase liquidity or limit firm failures Constrain Restructuring - Regulations and systems designed for nonshock periods may be inappropriate and constraining during shocks - Potential changes to regulations and legal challenges from government or private parties may increase uncertainty and discourage transactions Facilitate Restructuring - Enforcement may be relaxed and new facilitating rules fast tracked, facilitating restructuring Constrain Restructuring - Macroeconomic stabilization efforts may hinder micro-economic adjustments - Industrial and political policies designed to stabilize or boost economic activity may limit restructuring options Facilitate Restructuring - Economic conditions or pressures from global institutions may encourage flexible regulations that facilitate restructuring - Governments may introduce schemes to promote and fund consolidation among firms Constrain Restructuring - Disruption and uncertainty reduce trust in firms and public organizations, limiting firms' options - Governments may constrain restructuring to limit possible exploitative acts by firms Facilitate Restructuring - Government and public organizations may coordinate and guide restructuring as part of stabilization actions Constrain Restructuring - Collective agreements with unions or government bodies may prevent actions that may affect HR or employment changes Facilitate Restructuring - Relaxation of some rules and regulations may facilitate restructuring

State structure and political regime

Constrain Restructuring - Additional constraints on capital markets and financial instruments may be introduced - Government restructuring of financial sector may hinder financial transactions Facilitate Restructuring - Financial restructuring may be encouraged as part of stabilisation or to increase liquidity in economy - Constraints to transactions with foreign parties may be reduced

Constrain Restructuring - Political considerations may limit actions that result in increased layoffs Facilitate Restructuring - Governments may provide support for restructuring that increases employment or investments or restructures ownership and management - Initiatives to maintain employment may allow some forms of restructuring

Trust and authority structures

Constrain Restructuring - Key institutions and actors are blamed for shocks, limiting their ability to support restructuring - Lack of trust in capital markets and intermediaries hinder financial transactions Facilitate Restructuring - Crisis environment may encourage support for institutions to take bold actions in support of restructuring

Constrain Restructuring - Reduced trust in formal and informal institutions and actors increases the difficulty of labor and employment changes Facilitate Restructuring - Organizations that weather the shock may be perceived as more reliable and attract opportunities - Widespread action legitimizes firms' restructuring efforts

Table 3. Incidence of restructuring (1996-1999) Total 1998 47 11.0% 182 42.4% 200 Count of Restructuring: Singapore1 1997 1998 1999 23 7.8% 178 60.3% 94 32 15.2% 113 53.8% 65 40 16.8% 115 48.3% 83 South Korea1 1997 1998 1999 4 2.4% 51 31.1% 109 15 6.8% 69 31.5% 135 24 10.3% 88 37.8% 121

1996 Financial restructuring2 Portfolio restructuring3 Organizational restructuring4 30 5.4% 288 52.1% 235

1997 27 5.9% 229 49.9% 203

1999 64 13.6% 203

Total 168 8.8% 902

1996 28 9.0% 210 67.7% 72

Total 123 11.7% 616 58.5% 314

1996* 2 0.8% 78 32.1% 163

Total 45 5.2% 286 33.3% 528

43.1% 47.2% 204 842

42.5% 44.2% 46.6% 43.3% 44.0% 23.2% 31.9% 31.0% 34.9% 29.8% 67.1% 66.5% 61.6% 51.9% 61.5% Total 553 459 429 471 1912 310 295 210 238 1053 243 164 219 233 859 Average per firm 3.07 2.55 2.38 2.62 10.62 4.70 4.47 3.18 3.61 15.95 2.13 1.44 1.92 2.04 7.54 Note: 1. N=66 for Singapore, and 114 for South Korea 2. Financial restructuring includes issue of stocks and bonds, loans, attracting new investments, share and debt repurchase and swaps, reduction in debt payments, extension of debt maturity and other debt restructuring 3. Portfolio restructuring includes sell-offs, spin-offs, plant closures, withdrawals from businesses, divestment, acquisition, merger, establishing of new businesses, major investments, and setting up of joint ventures and alliances. 4. Organizational restructuring includes substantial expansion or reduction of internal operations, change of senior leadership and members of the board, changes in ownership among largest owners, major management and structural changes, early retirements and layoff programs, new hiring efforts and adjustments to employment and compensation terms. 5. Percentages are computed within columns, as the percentage of total restructuring actions for each year.

Table 4a. Descriptive statistics for Singapore
Mean S.D. 1. Restructuring(#) 3.99 5.22 2. Financial restructuring(#) 0.47 1.27 3. Portfolio restructuring(#) 2.33 3.3 4. Organizational Restructuring(#) 1.19 2.63 5. Group affiliated 0.2 0.4 6. ROA 0.03 0.09 7. Assets (US$Bn) 4.79 1.32 8. Foreign sales ratio 0.35 0.17 9. Age (years) 26.08 21.27 10. Debt assets ratio 27.08 18.21 11. Current ratio 1.7 0.99 12. High-tech 0.23 0.42 13. Medium-high tech 0.21 0.41 14. Medium-low tech 0.26 0.44 15. Low tech 0.3 0.46 1 0.43* 0.84* 0.73* 0.27* 0.06 0.35* 0.03 0.10 0.00 0.03 0.07 -0.08 -0.07 0.07 2 3 4 5 6 7 8 9 10 11 12 13

0.21* 0.11 0.06 -0.02 0.06 0.01 0.00 0.10 -0.08 0.20 -0.04 -0.11 -0.04 0.31* 0.24* 0.14* 0.37* -0.05 0.10 -0.07 0.06 0.10 -0.09 -0.09 0.08

0.21* -0.04 0.20* 0.11 0.08 0.04 0.02 -0.07 -0.01 0.01 0.06

0.03 0.36* 0.21* 0.28* 0.01 0.05 0.10 -0.07 0.06 -0.08

0.32* -0.03 -0.05 -0.31* 0.21* -0.03 0.01 -0.05 0.07

0.10 0.48* 0.10 0.03 -0.05 -0.11 -0.09 0.23*

0.23* -0.01 0.05 0.06 -0.05 -0.08 0.06

0.08 -0.10 -0.10 -0.14* -0.05 0.26*

-0.51* -0.04 0.09 -0.08 0.03

0.06 -0.08 0.08 -0.06

-0.28* -0.32* -0.31

-0.31* -0.34*


Note: n=66, *p<.05 Table 4b. Descriptive statistics for South Korea
1. Restructuring(#) 2. Financial restructuring(#) 3. Portfolio restructuring(#) 4. Organizational Restructuring(#) 5. Group affiliated 6. ROA 7. Assets (US$Bn) 8. Foreign sales ratio 9. Age (years) 10. Debt assets ratio 11. Current ratio 12. High-tech 13. Medium-high tech 14. Medium-low tech 15. Low tech Mean 1.88 0.1 0.63 1.16 0.44 0.04 6.36 0.35 3.46 46.73 1.25 0.15 0.23 0.19 0.43 S.D. 5.86 0.58 1.93 4.27 0.50 0.09 1.49 0.39 0.40 26.74 1.19 0.36 0.42 0.40 0.50 1 0.36* 0.80* 0.96* 0.25* 0.10* 0.39* -0.07 0.02 0.10* -0.05 0.22* 0.09* -0.11* -0.15* 2 3 4 5 6 7 8 9 10 11 12 13

0.22* 0.26* 0.12* -0.04 0.11* -0.05 0.05 0.09 -0.02 0.04 0.08 -0.05 -0.05 0.62* 0.21* 0.11* 0.29* -0.07 0.02 0.09 -0.05 0.13* 0.08 -0.09 -0.09

0.23* 0.09 0.39* -0.05 0.02 0.09 -0.04 0.24* 0.08 0.10* -0.16*

0.09* 0.35* -0.09* 0.11* 0.08 -0.13* -0.02 0.11* 0.06 -0.12*

0.14* 0.03 -0.01 -0.29* 0.08 0.07 0.01 0.03 -0.08

-0.06 0.07 0.17* -0.34* 0.05 -0.09* 0.14* -0.06

-0.06 -0.05 0.06 0.01 -0.02 -0.02 0.03

-0.02 -0.04 -0.16* 0.07 -0.01 0.07

-0.25* 0.06 -0.09* -0.04 0.07

0.11* 0.16* -0.05 -0.18*

-0.23* -0.21* -0.36*

-0.27* -0.47*


Note: n=114, *p<.05

Table 5. Restructuring before and during the economy-wide shock (1996-1999) Count of Restructuring: Financial Portfolio Organizational Total Model 1 Model 2 Model 3 Model 4 Shock period -0.099 1.346*** -0.168 -0.226 (H1a) (0.113) (0.312) (0.158) (0.186) Group affiliated 0.457* -0.507 0.493** 0.557* (0.179) (0.335) (0.183) (0.253) ROA -1.257 -4.905 2.989 0.213 (2.783) (5.216) (2.664) (4.793) ROA2 7.199 27.609+ 0.424 -0.706 (12.320) (15.132) (9.576) (22.219) Size 0.277+ 0.310* 0.183 0.299* (0.157) (0.137) (0.168) (0.150) Foreign sales ratio -0.395 -2.510** -0.517 0.224 (0.319) (0.955) (0.471) (0.474) Age -0.003 0.015* -0.003 -0.000 (0.005) (0.007) (0.004) (0.006) Debt assets ratio 0.002 -0.006 0.005 0.004 (0.006) (0.011) (0.006) (0.009) Current ratio 0.146 -0.202 0.082 0.142 (0.125) (0.248) (0.098) (0.146) High tech 0.387 0.455 0.003 0.589 (0.260) (0.344) (0.254) (0.402) Med-high tech 0.316 0.077 -0.029 0.562 (0.298) (0.428) (0.277) (0.402) Med-low tech -0.303 -0.530 -0.263 -0.139 (0.328) (0.579) (0.285) (0.451) Singapore 0.612 1.870** 1.197 0.433 (0.543) (0.611) (0.762) (0.523) Constant -0.634 -2.471+ -1.078 -1.644 (1.550) (1.482) (1.864) (1.687) Log Likelihood -1619 -300.0 -953.3 -899.0 Wald Chi-sq (13 df) 34.95*** 76.11*** 31.85** 49.67*** N=647; *** p<0.001, ** p<0.01, * p<0.05, + p<0.1 Zero-inflated Poisson Regression; robust standard errors adjusted for clustering by firms in parentheses

Table 6. Restructuring before and during an economy-wide shock for Singapore and South Korea (1996-1999) Singapore: Count of Restructuring South Korea: Count of Restructuring Financial Portfolio Organizational Financial Portfolio Organizational Total Total Model 2 Model 3 Model 4 Model 6 Model 7 Model 8 Model 1 Model 5 Shock period -0.352** 0.282 -0.498*** -0.303 0.739*** 1.930*** 0.577* 0.823** (H1a, H1b) (0.124) (0.371) (0.134) (0.198) (0.197) (0.493) (0.253) (0.265) Group affiliated 0.657** 0.289 0.650** 1.109** 1.050** 0.885+ 1.034** 0.986* (0.247) (0.403) (0.222) (0.367) (0.380) (0.535) (0.358) (0.414) ROA -1.404 -2.211 -2.160 -1.467 11.281** 5.858 14.168** 9.885* (2.270) (4.678) (2.568) (3.241) (3.522) (4.045) (4.769) (3.912) ROA2 -3.006 5.379 5.838 -7.112 -9.629** -4.105 -11.890** -8.653* (8.401) (17.621) (8.567) (13.226) (3.697) (4.243) (4.611) (4.057) Size 0.334** 0.124 0.357*** 0.404** 0.185 0.258 0.111 0.232 (0.114) (0.182) (0.106) (0.152) (0.156) (0.281) (0.160) (0.187) Foreign sales ratio 0.175 -0.478 -0.596 1.415 -1.513* -2.421* -2.289** -0.501 (0.461) (0.907) (0.479) (0.972) (0.697) (1.152) (0.860) (0.494) Age -0.009 -0.006 -0.006 -0.014 -0.004 0.004 0.004 -0.004 (0.005) (0.011) (0.005) (0.010) (0.014) (0.020) (0.013) (0.016) Debt assets ratio -0.003 -0.003 -0.009 0.003 0.016+ 0.019+ 0.019* 0.013 (0.006) (0.011) (0.006) (0.009) (0.009) (0.010) (0.009) (0.011) Current ratio -0.095 -0.253 -0.082 -0.056 -0.079 0.397 -0.126 -0.085 (0.146) (0.213) (0.130) (0.198) (0.154) (0.356) (0.167) (0.184) High tech -0.069 0.738 -0.038 -0.499 0.453 -0.925 0.094 1.015+ (0.305) (0.518) (0.280) (0.525) (0.601) (0.898) (0.549) (0.575) Med-high tech -0.099 -0.026 -0.199 0.136 0.417 -0.352 0.252 0.814 (0.319) (0.434) (0.292) (0.569) (0.518) (0.763) (0.469) (0.530) Med-low tech -0.362 -0.506 -0.376 -0.486 -0.972* -1.873* -1.171* -0.766 (0.315) (0.442) (0.283) (0.491) (0.491) (0.873) (0.539) (0.541) Constant 0.253 -0.855 -0.005 -1.946* -2.611 -6.693* -3.198+ -3.870* (0.640) (0.878) (0.638) (0.976) (1.646) (2.783) (1.663) (1.631) Log Likelihood -616.8 -206.1 -489.7 -337.4 -483.5 -91.17 -310.2 -355.2 Wald chi-sq (12 df) 55.65*** 20.56+ 107.4*** 34.60*** 111.7*** 40.42*** 117.8*** 101.7*** N=260 for Singapore and 387 for South Korea; *** p<0.001, ** p<0.01, * p<0.05, + p<0.1 Negative Binomial Regression; robust standard errors adjusted for clustering by firms in parentheses

Table 7. Restructuring during the shock for Singapore and South Korea (1998 & 1999) Singapore: Count of Restructuring South Korea: Count of Restructuring Financial Portfolio Organizational Financial Portfolio Organizational Total Total Model 2 Model 3 Model 4 Model 6 Model 7 Model 8 Model 1 Model 5 Group affiliated 0.477 -0.502 0.613 0.531 2.047*** 2.170* 1.711*** 2.316** (H2a, H2b) (0.393) (0.776) (0.380) (0.503) (0.579) (0.926) (0.498) (0.792) ROA -5.992+ -11.487* -6.453+ -0.098 4.358 8.280 7.232 -0.041 (H3a) (3.271) (5.785) (3.553) (4.236) (5.675) (8.066) (7.198) (6.452) ROA2 21.200+ 46.716* 18.023 9.103 22.326 58.397 -0.462 48.466 (12.824) (19.435) (13.345) (17.013) (31.270) (36.163) (16.927) (39.919) Group*ROA 0.306 3.648 0.642 -2.825 -12.998+ -28.274** -5.655 -19.286+ (H3b) (2.830) (7.184) (2.355) (4.420) (7.723) (10.006) (5.017) (9.961) Group*ROA2 0.168 -1.134+ 0.004 0.668 0.593* 0.601+ 0.587* 0.609* (0.342) (0.663) (0.353) (0.411) (0.263) (0.312) (0.287) (0.287) Size 0.187 0.170 0.241+ 0.125 -0.118 0.014 -0.129 -0.176 (0.124) (0.283) (0.137) (0.178) (0.174) (0.272) (0.194) (0.190) Foreign sales ratio 0.216 2.409 -0.608 1.422 -1.120+ -2.320+ -1.122 -0.813 (0.735) (1.617) (0.986) (0.995) (0.581) (1.332) (0.718) (0.718) Age -0.001 0.001 -0.001 -0.007 -0.011 -0.011 -0.000 -0.027 (0.005) (0.014) (0.006) (0.008) (0.014) (0.026) (0.019) (0.018) Debt assets ratio 0.007 0.013 -0.008 0.031** 0.012 0.029* 0.009 0.009 (0.009) (0.019) (0.010) (0.011) (0.010) (0.012) (0.009) (0.009) Current ratio 0.035 -0.025 -0.033 0.176 0.258 0.332 0.099 0.374+ (0.204) (0.467) (0.180) (0.222) (0.188) (0.302) (0.192) (0.197) High tech 0.508 2.521*** 0.204 0.102 0.283 -0.599 -0.242 0.084 (0.353) (0.763) (0.370) (0.434) (0.787) (1.037) (0.913) (0.740) Med-high tech 0.190 1.316+ -0.130 0.254 -0.597 -0.377 -0.602 -0.418 (0.346) (0.737) (0.394) (0.511) (0.449) (0.771) (0.474) (0.532) Med-low tech -0.119 0.671 -0.396 0.125 -1.415** -0.738 -2.142*** -1.035+ (0.432) (0.741) (0.440) (0.534) (0.433) (0.755) (0.603) (0.530) Restructuring 1.896* 11.553* 1.830* 2.924 3.168*** 4.408 3.003* 5.412** predictor (0.892) (4.503) (0.769) (1.992) (0.900) (3.674) (1.192) (1.899) Constant -1.417+ -6.387** -1.076 -3.722*** -1.281 -4.490* -1.752 -1.157 (0.804) (1.961) (0.834) (1.088) (1.374) (2.047) (1.865) (1.450) Log Likelihood -276.5 -88.94 -209.3 -152.0 -239.0 -62.35 -155.0 -168.0 Wald chi-sq (14 df) 49.86*** 33.91** 44.75*** 49.20*** 59.82*** 37.07*** 40.42*** 37.83*** N=129 for Singapore and 197 for South Korea; *** p<0.001, ** p<0.01, * p<0.05, + p<0.1 Negative Binomial Regression; robust standard errors adjusted for clustering by firms in parentheses

Table 8. Effects of restructuring on performance during the shock for Singapore and South Korea (1998 & 1999)
South Korea: Tobin's q OrganizOrganizFinancial Portfolio Financial Portfolio Total Total ational atonal Model 2 Model 3 Model 4 Model 6 Model 7 Model 8 Model 1 Model 5 Restructuring 0.030 0.549*** -0.059 0.237 0.087* 0.706* 0.061 0.092+ (H4a) (0.029) (0.152) (0.065) (0.152) (0.040) (0.335) (0.050) (0.056) Restructuring2 0.003** -0.038** 0.014* -0.008 -0.004* -0.167+ -0.006 -0.007 (0.001) (0.013) (0.006) (0.014) (0.002) (0.101) (0.005) (0.005) Group affiliated 0.048 -0.004 -0.040 0.036 0.001 0.014 -0.015 -0.002 (0.167) (0.112) (0.180) (0.142) (0.052) (0.050) (0.050) (0.049) Group* -0.030 -0.557 0.016 -0.297+ -0.067 -0.632+ -0.032 -0.073 restructuring (H4b) (0.040) (0.396) (0.084) (0.170) (0.045) (0.351) (0.065) (0.059) Group* -0.002 0.059 -0.008 0.017 0.003+ 0.161 0.005 0.007 restructuring2 (0.001) (0.080) (0.009) (0.015) (0.002) (0.102) (0.007) (0.005) ROA 0.523 1.632 -0.105 0.027 -0.830+ -0.821+ -0.947* -0.837* (1.367) (1.493) (1.694) (1.365) (0.426) (0.434) (0.391) (0.420) ROA2 -8.864** -12.645** -7.155+ -8.772** -0.235 -0.135 -0.271 -0.316 (3.439) (4.344) (3.684) (3.336) (0.394) (0.400) (0.370) (0.390) Size -0.322*** -0.094 -0.282** -0.300** -0.016 0.008 -0.011 -0.014 (0.089) (0.064) (0.100) (0.105) (0.016) (0.019) (0.015) (0.016) Foreign sales ratio -0.110 -0.047 0.049 -0.409 0.005 0.010 -0.005 -0.002 (0.281) (0.305) (0.312) (0.280) (0.020) (0.020) (0.021) (0.020) Age 0.003 -0.000 0.001 0.003 -0.005** -0.005** -0.005** -0.005** (0.003) (0.003) (0.004) (0.003) (0.002) (0.002) (0.002) (0.002) Debt assets ratio -0.004 -0.004 -0.000 -0.004 0.005*** 0.004*** 0.005*** 0.005*** (0.004) (0.004) (0.004) (0.004) (0.001) (0.001) (0.001) (0.001) Current ratio -0.098+ -0.002 -0.082 -0.034 0.035 0.034 0.037 0.034 (0.057) (0.069) (0.070) (0.063) (0.023) (0.024) (0.026) (0.025) High tech -0.110 -0.331+ -0.004 -0.099 0.178* 0.238** 0.196* 0.188* (0.150) (0.173) (0.169) (0.172) (0.084) (0.084) (0.080) (0.081) Med-high tech 0.116 -0.058 0.122 0.045 -0.044 -0.009 -0.037 -0.043 (0.157) (0.157) (0.180) (0.172) (0.066) (0.068) (0.061) (0.064) Med-low tech -0.089 -0.202 -0.111 -0.154 -0.071 -0.083+ -0.077+ -0.080+ (0.161) (0.136) (0.169) (0.165) (0.047) (0.048) (0.046) (0.047) Restructuring 1.461** 4.059** 1.468* 2.439** -0.030 -0.002 0.062 0.045 predictor (0.528) (1.553) (0.597) (0.940) (0.132) (0.439) (0.118) (0.201) Constant 2.056*** 1.014* 2.021*** 2.077*** 0.926*** 0.817*** 0.873*** 0.896*** (0.360) (0.487) (0.440) (0.417) (0.158) (0.187) (0.147) (0.153) Wald chi-sq (16 df) 515.8*** 138.8*** 49.09*** 75.31*** 783.1*** 508.5*** 872.5*** 974.0*** N=129 for Singapore and 197 for South Korea; *** p<0.001, ** p<0.01, * p<0.05, + p<0.1 GEE population-averaged model with exchangeable correlations; robust standard errors adjusted for clustering by firms in parentheses Singapore: Tobin's q

Appendix 1. Economic Data and Impact of Crisis Singapore 1995 GDP (constant 2000 US$billion)1 GDP growth (%) GDP per capita (constant 2000 US$) Inflation (%) Unemployment (%) Foreign trade in services (% of GDP) Foreign trade in merchandise (% of GDP) FDI net outflows (% of GDP) FDI, net inflows (% of GDP) Exchange rate (local units per US$, year average) 68.23 9.17 19,359 1.72 2.06 57.58 288.02 8.05 13.69 1.42 1996 73.55 7.00 20,036 1.38 2.05 55.60 276.98 8.59 10.46 1.41 1997 79.68 4.65 20,990 2.00 2.61 53.03 268.52 11.37 14.35 1.48 1998 78.58 -6.85 20,010 -0.27 6.96 53.62 256.83 2.63 8.88 1.67 1999 84.24 9.49 21,280 0.02 6.34 62.47 273.26 9.69 20.07 1.69 2000 92.72 8.49 23,019 1.36 4.42 63.24 293.74 6.38 17.78 1.72 1995 430.55 8.15 9,548 4.48 2.69 9.40 50.31 0.69 0.34 771.27 1996 460.68 7.79 10,119 4.92 2.99 9.50 50.22 0.82 0.42 804.45 South Korea 1997 482.12 8.34 10,491 4.45 2.05 10.81 54.38 0.85 0.55 1998 449.06 -1.38 9,702 7.51 2.73 14.51 65.31 1.37 1.57 1999 491.66 7.20 10,547 0.81 4.90 12.06 59.15 0.94 2.10 2000 533.38 10.06 11,347 2.26 5.96 11.98 62.38 0.94 1.74

951.29 1401.44 1188.82 1130.96

3.52 3.67 3.80 3.93 3.96 4.03 45.09 45.53 45.95 46.29 46.62 47.01 Population (millions) Foreign banking entities in 128 131 140 142 133 132 49 48 50 45 43 40 country3,4 Foreign affiliates in 18154 24114 3878 6486 country5 Note: 1. GDP: Gross domestic product; FDI: foreign direct investment. 2. All data is from World Development Indicators ( unless indicated. 3. Source for Singapore: Monetary Authority of Singapore, 4. Source for South Korea: Jeon Y, Miller SM, Yi I. 2007. Performance comparisons and the role of restructuring for foreign and domestic banks, SSRN: 5. Source: UNCTAD (2000)

46 Appendix 2. Institutional Environments in Singapore and South Korea (1990s)

Singapore South Korea - Relatively closed markets, with under- Open, but with restrictions in selected areas, and with relatively well-developed regulations developed and poorly enforces regulatory and and governance frameworks. governance frameworks. - Stock exchange competed to attract foreign - Stock exchanges and financial markets listings and investments; restrictions on foreign restricted foreign listings and investments, and ownership exist in limited areas. foreign ownership of local firms. - Very large presence of foreign financial - Strong constraints on foreign financial institutions and capital, though with restrictions institutions establishing operations in Korea. in retail banking and finance. - Strong formal and informal restrictions on - Few restrictions on foreign acquisitions of foreign acquisitions of domestic firms, with domestic firms and almost no restrictions on FDI. constraints on FDI in many areas. - Domestic firms had ready access to local capital - Most domestic firms faced constraints in markets and foreign sources of capital. accessing foreign capital markets. - Relatively rigid, with strong informal and Labour - Relatively flexible, with few restrictions on formal restrictions on internal or cross border markets inward or cross border movement. movement of managers and employees. - Regulations aimed primarily to support - Employment and labour regulations aimed economic growth and limit disruption to firms. primarily at supporting large businesses. - Orderly tripartite employer-union-government - Disruptive employer-union relations, with system coordinated negotiations, arbitrated disputes and eliminated major industrial conflict. ritualized and confrontational industrial action. Product - Developed and largely free markets with almost - Well developed, but with strong formal and markets informal barriers on imports and MNC no barriers on imports or foreign participation. participation. - Among the most open and globalized of - Technologically advanced but relatively economies. Highly integrated with global isolated from external markets and trends. markets. - Civil law, derived from German system. Legal - Derived from English common law. systems - Regulations focused on supporting economic - Economic regulations designed to support growth and imposed relatively limited constraints governments' industrial policies and business on business except in selected areas. groups. - Major MNCs presence resulted in most rules - Limited influence of foreign institutions, and regulations conforming to Western systems. resulting in local and idiosyncratic systems. State - Developmental global-city state based on single - Developmental state based on multiple structure party political dominance and a pragmatic political parties driven by strong sense of and ideology prioritising economic development, economic nationalism. State maintained strong political political stability and a non-confrontational links with business elites and prioritised regime approach to most issues. development centred on business groups. Trust and - Economic exchange based on strong trust in - Formal institutions related to business were not authority formal institutions, which had substantial fully developed or trusted. structures authority based on government links and strong - Economic exchange importantly influenced by economic growth. Informal institutions had informal institutions. relatively little impact on economic exchange. Dominant - GLCs were the dominant domestic group, - Family-based business groups were dominant, business though some family business groups were accounting for very large share of the economy groups prominent. and exports. - Government was very active in business - Government intervened heavily in business through economic and industrial policies and with policies designed to channel resources to operations of its statutory boards; direct business groups, as the key drivers of economic growth. participation occurred through GLCs. Source: Authors, Dent (2002), Feenstra and Hamilton (2006), Huff (1995), Rodan et al. (2006) and Whitley (1999). Capital markets