Survival of financially distressed SMEs and out-of-court versus in-court reorganization: Explanatory internal factors

Abstract

The Directive (EU) 2019/1023 of 20th June 2019 on preventive restructuring frameworks, have highlighted the need to evaluate, the possibilities of restructuring insolvent companies, but viable in the future. Based on the Theory of Resources, this research aims to identify those internal factors that contribute to explain the differences in the outcome of failure SMEs. To do this, a sample of 6,285 Spanish SMEs that failed in the 2008-2010 period was used and the evolution of each of them during the 2011-2013 period is observed. We have two aims: (1) to identify the internal differences influencing the path of reorganizations versus liquidation of failed SMEs, allowing a diagnosis of the firmt's economic and financial situation in order to prevent its disappearance; and (2) to recognize significantly internal differences between reorganized outof-court and those reorganized in-court. Specifically, our results reveal that the ability of the firm to create value and to manage the receivable and working capital financial design and the level of historical slack contribute to understand the differences between SMEs that are able to overcome difficult situations and survive of those that are liquidated. In addition, our results also reveal that the level of assets and debts are the main difference between firms that opt for an out-of-court reorganization and those that follow a judicial reorganization process.