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

37 Pages Posted: 13 Sep 2012

See all articles by Régis Blazy

Régis Blazy

University of Strasbourg

Jocelyn Martel

ESSEC Business School

Nirjhar Nigam

ICN BUSINESS SCHOOL

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Date Written: July 30, 2012

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 the coordination vs. bargaining power issues, informational problems, firms’ characteristics, and loan characteristics. Using a sequential LOGIT approach, we first find that the probability of 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.

Keywords: bankruptcy, renegotiation, banks, SME, sequential LOGIT

JEL Classification: G33, K22

Suggested Citation

Blazy, Régis and Martel, Jocelyn and Nigam, Nirjhar, The Choice between Informal and Formal Restructuring: The Case of French Banks Facing Distressed SMEs (July 30, 2012). Available at SSRN: https://ssrn.com/abstract=2145812 or http://dx.doi.org/10.2139/ssrn.2145812

Régis Blazy (Contact Author)

University of Strasbourg ( email )

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

Jocelyn Martel

ESSEC Business School ( email )

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

Nirjhar Nigam

ICN BUSINESS SCHOOL ( email )

13 rue Michel Ney
Nancy, 54000
France

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