IDEAS home Printed from https://ideas.repec.org/a/kap/sbusec/v57y2021i1d10.1007_s11187-019-00293-z.html
   My bibliography  Save this article

SME insolvency, bankruptcy, and survival: an examination of retrenchment strategies

Author

Listed:
  • Manuel Rico

    (Universitat de València)

  • Naresh R. Pandit

    (University of East Anglia)

  • Francisco Puig

    (Universitat de València)

Abstract

A key assertion in the turnaround literature is that when survival is threatened, it is necessary to undertake asset and cost retrenchment strategies that stabilise the performance decline and provide a base for survival and recovery. Correcting for methodological weaknesses in the literature, this study of Spanish SMEs finds that retrenchment of inventory and employees is associated with liquidation. Furthermore, neither intangible asset nor tangible asset retrenchment is associated with survival. Only retrenchment of debt is associated with survival. These results challenge conventional wisdom on retrenchment in turnaround situations. Automatic, across-the-board retrenchment is not a universal panacea to achieve turnaround and should not be implemented as a reflex response to insolvency. Instead, managers of insolvent firms should focus on liquidity and operational improvements, which result in debt reduction. Great care should be taken with the need for, and the extent of, retrenchment in inventory and employees.

Suggested Citation

  • Manuel Rico & Naresh R. Pandit & Francisco Puig, 2021. "SME insolvency, bankruptcy, and survival: an examination of retrenchment strategies," Small Business Economics, Springer, vol. 57(1), pages 111-126, June.
    • Handle: RePEc:kap:sbusec:v:57:y:2021:i:1:d:10.1007_s11187-019-00293-z
    DOI: 10.1007/s11187-019-00293-z
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11187-019-00293-z
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11187-019-00293-z?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kose John, 1993. "Managing Financial Distress and Valuing Distressed Securities: A Survey and a Research Agenda," Financial Management, Financial Management Association, vol. 22(3), Fall.
    2. Robert D. Nixon & Michael A. Hitt & Ho‐Uk Lee & Eui Jeong, 2004. "Market reactions to announcements of corporate downsizing actions and implementation strategies," Strategic Management Journal, Wiley Blackwell, vol. 25(11), pages 1121-1129, November.
    3. Joan Winn, 1997. "Asset Productivity Turnaround: the Growth/Efficiency Challenge," Journal of Management Studies, Wiley Blackwell, vol. 34(4), pages 585-600, July.
    4. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2012. "Why do spanish firms rarely use the bankruptcy system? The role of the mortgage institution," Working Papers 1234, Banco de España.
    5. Denis, Diane K. & Shome, Dilip K., 2005. "An empirical investigation of corporate asset downsizing," Journal of Corporate Finance, Elsevier, vol. 11(3), pages 427-448, June.
    6. Jose L. Barbero & Alicia Ramos & Catherine Chiang, 2017. "Restructuring in dynamic environments: a dynamic capabilities perspective," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(4), pages 593-615.
    7. Pearce II, John A. & Robbins, D. Keith, 2008. "Strategic transformation as the essential last step in the process of business turnaround," Business Horizons, Elsevier, vol. 51(2), pages 121-130.
    8. Åstebro, Thomas & Winter, Joachim, 2012. "More than a dummy: The probability of failure, survival and acquisition of firms in financial distress," Munich Reprints in Economics 20185, University of Munich, Department of Economics.
    9. Achim Schmitt & Sebastian Raisch, 2013. "Corporate Turnarounds: The Duality of Retrenchment and Recovery," Journal of Management Studies, Wiley Blackwell, vol. 50(7), pages 1216-1244, November.
    10. Garry D. Bruton & David Ahlstrom & Johnny C. C. Wan, 2003. "Turnaround in East Asian firms: evidence from ethnic Overseas Chinese communities," Strategic Management Journal, Wiley Blackwell, vol. 24(6), pages 519-540, June.
    11. Andrew Wild & Andy Lockett, 2016. "Turnaround and failure: Resource weaknesses and the rise and fall of Jarvis," Business History, Taylor & Francis Journals, vol. 58(6), pages 829-857, August.
    12. Nicholas Collett & Naresh R. Pandit & Jukka Saarikko, 2014. "Success and failure in turnaround attempts. An analysis of SMEs within the Finnish Restructuring of Enterprises Act," Entrepreneurship & Regional Development, Taylor & Francis Journals, vol. 26(1-2), pages 123-141, April.
    13. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, European Finance Association, vol. 9(1), pages 65-96.
    14. John, Kose & Lang, Larry H P & Netter, Jeffry, 1992. "The Voluntary Restructuring of Large Firms in Response to Performance Decline," Journal of Finance, American Finance Association, vol. 47(3), pages 891-917, July.
    15. Kalle Pajunen, 2006. "Stakeholder Influences in Organizational Survival," Journal of Management Studies, Wiley Blackwell, vol. 43(6), pages 1261-1288, September.
    16. Howard S. Rasheed, 2005. "Turnaround Strategies For Declining Small Business: The Effects Of Performance And Resources," Journal of Developmental Entrepreneurship (JDE), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 239-252.
    17. Cook, Gary A S & Pandit, Naresh R & Milman, David, 2001. "Formal Rehabilitation Procedures and Insolvent Firms: Empirical Evidence on the British Company Voluntary Arrangement Procedure," Small Business Economics, Springer, vol. 17(4), pages 255-271, December.
    18. Kamel Mellahi & Adrian Wilkinson, 2010. "A Study of the Association between Level of Slack Reduction Following Downsizing and Innovation Output," Journal of Management Studies, Wiley Blackwell, vol. 47(3), pages 483-508, May.
    19. Bhimani, Alnoor & Gulamhussen, Mohamed Azzim & Lopes, Samuel Da-Rocha, 2010. "Accounting and non-accounting determinants of default: An analysis of privately-held firms," Journal of Accounting and Public Policy, Elsevier, vol. 29(6), pages 517-532, November.
    20. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, Springer, vol. 9(1), pages 65-96, March.
    21. Lars Schweizer & Andreas Nienhaus, 2017. "Corporate distress and turnaround: integrating the literature and directing future research," Business Research, Springer;German Academic Association for Business Research, vol. 10(1), pages 3-47, June.
    22. Birger Wernerfelt, 1995. "The resource‐based view of the firm: Ten years after," Strategic Management Journal, Wiley Blackwell, vol. 16(3), pages 171-174.
    23. Chowdhury, Shamsud D. & Lang, James R., 1996. "Turnaround in small firms: An assessment of efficiency strategies," Journal of Business Research, Elsevier, vol. 36(2), pages 169-178, June.
    24. Stewart Thornhill & Raphael Amit, 2003. "Learning About Failure: Bankruptcy, Firm Age, and the Resource-Based View," Organization Science, INFORMS, vol. 14(5), pages 497-509, October.
    25. Vincent L. Barker Iii & Irene M. Duhaime, 1997. "Strategic Change In The Turnaround Process: Theory And Empirical Evidence," Strategic Management Journal, Wiley Blackwell, vol. 18(1), pages 13-38, January.
    26. Kamala Arogyaswamy & Vincent L. Barker & Masoud Yasai‐Ardekani, 1995. "Firm Turnarounds: an Integrative Two‐Stage Model," Journal of Management Studies, Wiley Blackwell, vol. 32(4), pages 493-525, July.
    27. Boone, Jan, 2000. "Technological Progress, Downsizing and Unemployment," Economic Journal, Royal Economic Society, vol. 110(465), pages 581-600, July.
    28. Castrogiovanni, Gary J. & Bruton, Garry D., 2000. "Business Turnaround Processes Following Acquisitions: Reconsidering the Role of Retrenchment," Journal of Business Research, Elsevier, vol. 48(1), pages 25-34, April.
    29. Thomas B. Astebro & J. K. Winter, 2012. "More than a Dummy: The Probability of Failure, Survival and Acquisition of Private Firms in Financial Distress," Post-Print hal-00715485, HAL.
    30. Chanchai Tangpong & Michael Abebe & Zonghui Li, 2015. "A Temporal Approach to Retrenchment and Successful Turnaround in Declining Firms," Journal of Management Studies, Wiley Blackwell, vol. 52(5), pages 647-677, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Diego A. B. Marconatto & Gaspar A. Peixoto & Emidio G. Teixeira & Adelar Fochezatto, 2022. "Women on the Front Line: The Growth of SMEs during Crises," Sustainability, MDPI, vol. 14(16), pages 1-18, August.
    2. Luminița RUS & Daniela ZĂPODEANU & Carmen SCORȚE & Sorina MOCIAR-COROIU, 2022. "Indicators And 3r-Type Measures In Overcoming Financial Difficulties Of Companies," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 2(2), pages 153-165, December.
    3. Grillitsch, Markus & Asheim, Björn & Fünfschilling, Lea & Kelmenson, Sophie & Lowe, Nichola & Lundquist, Karl Johan & Mahmoud, Yahia & Martynovich, Mikhail & Mattson, Pauline & Miörner, Johan & Nilsso, 2023. "Rescaling: An Analytical Lense to Study Economic and Industrial Shifts," Papers in Innovation Studies 2023/11, Lund University, CIRCLE - Centre for Innovation Research.
    4. Abhi Bhattacharya & Joseph Johnson & Ashkan Faramarzi & Niket Jindal & Ross W. Johnson, 2024. "Marketing capability and the turnaround of financially distressed firms," Journal of the Academy of Marketing Science, Springer, vol. 52(4), pages 1195-1215, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lars Schweizer & Andreas Nienhaus, 2017. "Corporate distress and turnaround: integrating the literature and directing future research," Business Research, Springer;German Academic Association for Business Research, vol. 10(1), pages 3-47, June.
    2. Jose L. Barbero & Alicia Ramos & Catherine Chiang, 2017. "Restructuring in dynamic environments: a dynamic capabilities perspective," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 26(4), pages 593-615.
    3. Laffranchini, Giacomo & Hadjimarcou, John & Kim, Si Hyun, 2022. "The first turnaround response of family firms in a crisis situation," Journal of Family Business Strategy, Elsevier, vol. 13(1).
    4. Achim Schmitt & Sebastian Raisch, 2013. "Corporate Turnarounds: The Duality of Retrenchment and Recovery," Journal of Management Studies, Wiley Blackwell, vol. 50(7), pages 1216-1244, November.
    5. Manuel Rico & Santiago Cantarero & Francisco Puig, 2021. "Regional Disparities and Spatial Dependence of Bankruptcy in Spain," Mathematics, MDPI, vol. 9(9), pages 1-20, April.
    6. Sofie Balcaen & Sophie Manigart & Hubert Ooghe, 2011. "From distress to exit: determinants of the time to exit," Journal of Evolutionary Economics, Springer, vol. 21(3), pages 407-446, August.
    7. Alexandra Bertschi-Michel & Philipp Sieger & Thomas Wittig & Andreas Hack, 2023. "Sacrifice, Protect, and Hope for the Best: Family Ownership, Turnaround Moves, and Crisis Survival," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1132-1168, July.
    8. Seema Miglani & Kamran Ahmed & Darren Henry, 2020. "Corporate governance and turnaround: Evidence from Australia," Australian Journal of Management, Australian School of Business, vol. 45(4), pages 549-578, November.
    9. Giacomo Laffranchini & John S Hadjimarcou & Si Hyun Kim, 2020. "The Impact of Socioemotional Wealth on Decline-Stemming Strategies of Family Firms," Entrepreneurship Theory and Practice, , vol. 44(2), pages 185-210, March.
    10. Andrew Chan & Francis Cheng & Shuk-Ling Cheng, 2023. "Post-Crisis Sustainable Performance of Manufacturing SMEs: The Roles of Positive Orientation, Financial Slack, and External Networks," Sustainability, MDPI, vol. 15(17), pages 1-18, August.
    11. Salwa Kessioui & Michalis Doumpos & Constantin Zopounidis, 2023. "A Bibliometric Overview of the State-of-the-Art in Bankruptcy Prediction Methods and Applications," World Scientific Book Chapters, in: Emilios Galariotis & Alexandros Garefalakis & Christos Lemonakis & Marios Menexiadis & Constantin Zo (ed.), Governance and Financial Performance Current Trends and Perspectives, chapter 6, pages 123-153, World Scientific Publishing Co. Pte. Ltd..
    12. Iwasaki, Ichiro & Kočenda, Evžen & Shida, Yoshisada, 2021. "Distressed acquisitions: Evidence from European emerging markets," Journal of Comparative Economics, Elsevier, vol. 49(4), pages 962-990.
    13. Wiklund, Johan & Baker, Ted & Shepherd, Dean, 2010. "The age-effect of financial indicators as buffers against the liability of newness," Journal of Business Venturing, Elsevier, vol. 25(4), pages 423-437, July.
    14. Linden, Erik, 2021. "Pandemics and environmental shocks: What aviation managers should learn from COVID-19 for long-term planning," Journal of Air Transport Management, Elsevier, vol. 90(C).
    15. Satish C. Pandey & Pramod Verma, 2005. "Organizational Decline and Turnaround: Insights from the Worldcom Case," Vision, , vol. 9(2), pages 51-65, April.
    16. Ludovico Maria Cocco & Elisa Cavezzali & Ugo Rigoni & Giorgia Simion, 2024. "How does soft information on the causes of default affect debt renegotiation? The Italian evidence," Annals of Finance, Springer, vol. 20(1), pages 45-89, March.
    17. S. Balcaen & J. Buyze & H. Ooghe, 2009. "Financial distress and firm exit: determinants of involuntary exits, voluntary liquidations and restructuring exits," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/598, Ghent University, Faculty of Economics and Business Administration.
    18. Sofie Balcaen & Sophie Manigart & Jozefien Buyze & Hubert Ooghe, 2012. "Firm exit after distress: differentiating between bankruptcy, voluntary liquidation and M&A," Small Business Economics, Springer, vol. 39(4), pages 949-975, November.
    19. Igor Filatotchev & Steve Toms, 2006. "Corporate Governance and Financial Constraints on Strategic Turnarounds," Journal of Management Studies, Wiley Blackwell, vol. 43(3), pages 407-433, May.
    20. Yanyi Ye & Yun Wang & Xiaoguang Yang, 2022. "Bank loan information and information asymmetry in the stock market: evidence from China," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-28, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:sbusec:v:57:y:2021:i:1:d:10.1007_s11187-019-00293-z. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.