Effective Turnaround for SMEs:Interaction between Insolvency Proceedings and Retrenchment Strategies

Extant research on turnaround acknowledges that when a firm begins to experience financial difficulties, retrenchment is the most frequent response. Should this strategy be unsuccessful, the firm proceeds to legal treatment through insolvency proceedings. However, little is known about the fact how firms' cans consider simultaneously or successively the use of out-of-court and in-court restructuring strategies. The goal of this study is to investigate the impact of the interplay between insolvency proceedings and retrenchment strategies on firm survival. We use a Cox proportional hazards model to predict survival probability on a sample of French SMEs. Our main findings are that the opening of insolvency proceedings has a significant and negative impact on firms' life expectancy. The influence of retrenchment differs whether it concerns employees or assets. Retrenchment in employees has a general and negative influence on firm's survival, but we find that this influence is even more pronounced in the presence of insolvency proceedings. In contrast, assets retrenchment increases firms' life expectancy. In this case, we observe that the insolvency proceedings increase this positive impact on survival likelihood. This research is likely to help researchers, legislators, and managers to better understand the effective use of retrenchment strategies within insolvency proceedings.