The Choice between Informal and Formal Restructuring: The Case of French Banks Facing Distressed SMEs

32 Pages Posted: 12 May 2011

See all articles by Jocelyn Martel

Jocelyn Martel

ESSEC Business School

Régis Blazy

University of Strasbourg

Nirjhar Nigam

ICN BUSINESS SCHOOL

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Date Written: May 1, 2011

Abstract

This empirical paper investigates the path to the resolution of financial distress for a sample of small and medium French firms in default, in particular on the decision between bankruptcy and informal (out-of-court) negotiations. The procedure is depicted as a sequential game in which stakeholders first decide whether or not to engage in an informal negotiation. Then, conditional on opting for negotiations, the debtor and its creditors can succeed or fail in reaching a workout agreement in order to restructure the firm’s capital structure. We test different hypotheses which captures i) the coordination vs. bargaining power issues, ii) informational problems, iii) firms’ characteristics, and iv) loan characteristics. Using a sequential LOGIT approach, we first find the probability of an opting for an informal negotiation decreases when the bank is the debtor’s main creditor and increases with the size of the loan and the proportion of long term debt. In addition, the likelihood of successfully reaching an informal agreement decreases when the management of a badly rated firm is considered as faulty and when the bank is the debtor’s main creditor. Finally, we find no evidence for the impact of collateral on the resolution to financial distress.

Suggested Citation

Martel, Jocelyn and Blazy, Régis and Nigam, Nirjhar, The Choice between Informal and Formal Restructuring: The Case of French Banks Facing Distressed SMEs (May 1, 2011). International Conference of the French Finance Association (AFFI), May 11-13, 2011. Available at SSRN: https://ssrn.com/abstract=1836895 or http://dx.doi.org/10.2139/ssrn.1836895

Jocelyn Martel

ESSEC Business School ( email )

Avenue Bernard Hirsch B.P. 50105
Cergy-Pontoise, 95021
France
33 1 34 43 33 21 (Phone)

Régis Blazy (Contact Author)

University of Strasbourg ( email )

61, avenue de la foret noire
Strasbourg, Alsace 3000
France

Nirjhar Nigam

ICN BUSINESS SCHOOL ( email )

13 rue Michel Ney
Nancy, 54000
France

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