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

Author

Listed:
  • Regis Blazy

    (LaRGE, University of Strasbourg)

  • Jocelyn Martel

    () (ESSEC Business School - Essec Business School)

  • Nirjhar Nigam

    (ICN Business School, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

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.

Suggested Citation

  • Regis Blazy & Jocelyn Martel & Nirjhar Nigam, 2014. "The choice between informal and formal restructuring: The case of French banks facing distressed SMEs," Post-Print hal-01369866, HAL.
  • Handle: RePEc:hal:journl:hal-01369866
    DOI: 10.1016/j.jbankfin.2014.04.015
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01369866
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    Cited by:

    1. Blazy, Régis & Letaief, Aziza, 2017. "When secured and unsecured creditors recover the same: The emblematic case of the Tunisian corporate bankruptcies," Emerging Markets Review, Elsevier, vol. 30(C), pages 19-41.
    2. repec:eur:ejisjr:185 is not listed on IDEAS
    3. Hussain, Inayat & Durand, Robert B. & Harris, Mark N., 2016. "Default resolution and access to fresh credit in an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 256-274.

    More about this item

    Keywords

    Bankruptcy; Renegotiation; Banks; SME; Sequential LOGIT;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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