Corporate Retrenchment and its Consequences for Bankruptcy Emergence
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2021-07-06
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en
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Understanding whether retrenchment actions provide a real option for resolving financial distress is essential for firms seeking to achieve turnaround and continue operating as a going concern. I examine the impact of two common methods of retrenchment, downsizing and bankruptcy, on the likelihood of bankruptcy emergence of a sample of 244 Dutch firms between 2005 and 2021. Using a logistic regression model, I find that downsizing processes that are accompanied by social plans improve the likelihood of bankruptcy emergence by providing signals of procedural and distributive fairness to the firm’s stakeholders, whereas downsizing without a social plan has no significant impact on the likelihood of bankruptcy emergence. As expected, I also find that the likelihood of bankruptcy emergence of firms going through a pre-packed bankruptcy is significantly higher than firms going through a conventional bankruptcy or suspension of payments procedure. The results are robust to several models, including controlling for lagged variables.
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Faculteit der Managementwetenschappen