Cognitive load, social values and financial distress: drivers of restructuring decisions

Fidèle Shukuru Balume, Jean-François Gajewski and Marco Heimann

Review of Accounting and Finance, 2024, vol. 23, issue 4, 506-536

Abstract: Purpose - This study aims to analyze the effect of cognitive load and social value orientation on managers’ preferences when they face with two types of restructuring choices in financially distressed firms: the first belonging to the family of organizational restructuring (massive layoffs) and the second to the family of financial restructuring (debt increases). Design/methodology/approach - The authors investigate experimentally the impact of managers’ cognitive load and social value orientation on the decision to restructure leveraged buyout (LBO) firms in financial distress by using either massive layoffs or debt increases. Findings - By investigating the impact of managers’ cognitive load and social value orientation on the restructuring decision of an LBO firm in financial distress, the research reveals that, on average, cognitively loaded managers prefer massive layoffs over increased debt levels. The massive layoffs seemingly provide a relatively easier way to avoid conflict with influential, residual claimants. In contrast, social value–oriented managers actively avoid massive layoffs and prefer to increase debt. Research limitations/implications - These results imply that the performance mechanisms emphasized to improve agency relations, for example, in LBOs, have their own limitations during periods of financial distress. This study shows that one of these limits is related to cognitive distortions and personality traits. Originality/value - In this research, the originality lies in understanding how managers’ internal factors affect their restructuring decision-making, in the case of LBO firms in financial distress.

Keywords: Cognitive load; Social preferences; Leverage buyout; Restructuring decision-making; G34; G41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:raf-07-2023-0212

DOI: 10.1108/RAF-07-2023-0212

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