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

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  • 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
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