The choice between informal and formal restructuring: The case of French banks facing distressed SMEs

Régis Blazy, Jocelyn Martel () and Nirjhar Nigam ()
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Jocelyn Martel: ESSEC Business School
Nirjhar Nigam: ICN Business School, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine

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Abstract: This empirical paper investigates the paths leading to the resolution of financial distress for a sample of small and medium-sized French firms in default, focusing in particular on their decisions between bankruptcy and informal (out-of-court) renegotiations. The procedure is depicted as a sequential game in which stakeholders first decide whether to engage in an informal renegotiation. Second, conditional on opting for renegotiation, the debtor and its creditors may succeed or fail in reaching an agreement to restructure the firm's capital structure. We test different hypotheses that capture (i) coordination and bargaining power issues, (ii) informational problems, (iii) firm characteristics, and (iv) loan characteristics. The empirical implementation is based on sequential LOGIT regressions. First, we find that the likelihood of informal renegotiations increases with loan size and the proportion of long-term debt. These two results support the argument that size matters when deciding whether to opt for informal renegotiation. Second, the probability of a successful renegotiation decreases when (i) the bank in charge of handling the process is the debtor's "main" creditor and when (ii) the firm is badly rated and its management is considered faulty. Third, the estimations show that collateral plays a significant role in the first stage of the renegotiation process. However, it does not impact the likelihood of success in reaching a renegotiated agreement. Finally, some banks are clearly better than others at leading successful renegotiation processes.

Keywords: Bankruptcy; Renegotiation; Banks; SME; Sequential LOGIT (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

Published in Journal of Banking and Finance, 2014, 44, pp.248 - 263. ⟨10.1016/j.jbankfin.2014.04.015⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01369866

DOI: 10.1016/j.jbankfin.2014.04.015

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