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Management turnover, ownership change, and post-bankruptcy failure of small businesses

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Abstract

We provide the first analysis of management turnover and ownership change as determinants of post-bankruptcy failure of small businesses. Examining micro-level data on Slovenian firms that attempted bankruptcy reorganization and utilizing multiple empirical approaches, we find that changes prior to completed reorganization proceedings never reduce, and in the case of foreign incoming owners or insider incoming managers in fact increase, prospects of firm liquidation. Firm liquidation prospects robustly decrease only with changes that occur after completed proceedings, involve ownership transfer, and feature domestic incoming owners. These results continue to hold under an alternative conceptualization of firm failure. Our findings are consistent with the importance of disruption costs in the process of turning around ailing small businesses. Our analysis casts novel light on the ongoing debate about the consequences of debtor-in-possession rule in bankruptcy and the relevance of successor origin in management turnover and ownership change for firm outcomes.

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Notes

  1. For an overview, see, e.g., Hotchkiss et al. (2008), LoPucki and Doherty (2015) and references therein.

  2. For a more thorough discussion of the SRP, see Cepec and Grajzl (2019).

  3. The legal loophole arose due to the inconsistent criteria for classification of firms in the Companies Act (Zakon o gospodarskih družbah) and the 2013 Insolvency Act (Zakon o finančnem poslovanju, postopkih zaradi insolventnosti in prisilnem prenehanju). As we show in sensitivity analysis, none of our qualitative findings change if we drop the larger business establishment from the sample.

  4. For an overview and insightful discussion, see, e.g., Warren and Westbrook (2009: 610–612), Moulton and Thomas (1993: 129), Altman et al. (2009: 54–55), and Denis and Rodgers (2007: 113–114).

  5. Analogous figures based on the alternative (broader) notion of firm failure are qualitatively very similar and thus omitted.

  6. Management buyouts and instances of ownership transfer where a minority owner would become a majority owner do not occur in our sample. This is not surprising given the small size of businesses under consideration.

  7. Due to very few instances of second change in ownership after completed reorganization proceedings (see Table 1), the corresponding effects could not be reliably estimated.

  8. In their seminal contribution, Barniv et al. (2002: 497) argue that “distinguishing between…post-bankruptcy filing outcomes is more difficult than discriminating between sound and financially distressed firms, which has been extensively studied in prior literature.”

  9. We have verified that other events do not exhibit a robust statistically significant relationship with our measures of firm failure.

  10. Indeed, the application of the Rosenbaum (2002, 2005) bounds test to assess the sensitivity of PSM results after dropping subsets of covariates revealed that the upper bound of p value based on Wilcoxon signed rank test (sig+) did not maintain five-percent significance up to the value of Gamma (a test-specific parameter) equal to five, a rule-of-thumb threshold to judge the reliability of PSM estimates in light possible selection on unobservables (see Cerulli 2015).

  11. King and Nielsen (2019: 15) similarly argue that “PSM is better justified (i.e., still suboptimal but not as much) when very large sample sizes are available.”

  12. Even larger values of δ and Rmax resulted in instability and even absence of computational solutions for the estimated bounds. That is, we have pushed the data to their limit.

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Acknowledgements

We are grateful to Marc Junkunc and two anonymous reviewers for helpful comments and suggestions. This project was conceived during Jaka Cepec’s Fulbright visit at the Washington and Lee University (W&L) School of Law. We thank the faculty and staff of W&L School of Law for their hospitality.

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Authors and Affiliations

  1. Faculty of Economics, University of Ljubljana, 1000, Ljubljana, Slovenia

    Jaka Cepec

  2. Department of Economics, The Williams School of Commerce, Economics, and Politics, Washington and Lee University, Lexington, VA, 24450, USA

    Peter Grajzl

  3. CESifo, Munich, Germany

    Peter Grajzl

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  1. Jaka Cepec
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Appendix

Appendix

Fig. 5
figure 5

Covariate balance before and after matching

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Table 8 Variable definitions, focal explanatory variables
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Table 9 Variable definitions, time-invariant control variables
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Table 10 OLS-LPM estimates, alternative notion of firm failure
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Cepec, J., Grajzl, P. Management turnover, ownership change, and post-bankruptcy failure of small businesses. Small Bus Econ 57, 555–581 (2021). https://doi.org/10.1007/s11187-020-00325-z

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