Professor Linda DeAngelo found evidence suggesting that when the management of a company is ousted under fire, the new management tends to take an earnings “bath” after gaining control. A “bath” is a large reduction in earnings due to asset write-downs, reorganization charges, discontinuance of segments, and other extraordinary charges.
As an example, Circle K Corporation declared Chapter 11 bankruptcy and changed management during fiscal 1990. For the year, Circle K reported a reorganization and restructuring charge of $639 million, consisting primarily of write-downs of long-term assets. This contributed to a net loss for the year of $773 million, compared to average net income for the previous four years of about $40 million per year. Why might the new management of a company want to “take a bath” in its first year?