A key assertion in the turnaround literature is that when survival is threatened, it is necessary to undertake asset and cost retrenchment strategies that stabilise the performance decline and provide a base for survival and recovery. Correcting for methodological weaknesses in the literature, this study of Spanish SMEs finds that retrenchment of inventory and employees is associated with liquidation. Furthermore, neither intangible asset nor tangible asset retrenchment are associated with survival. Only retrenchment of debt is associated with survival. These results challenge conventional wisdom on retrenchment in turnaround situations. Automatic, across-the-board retrenchment is not a universal panacea to achieve turnaround and should not be implemented as a reflex response to insolvency. Instead, managers of insolvent firms should focus on liquidity and operational improvements, which result in debt reduction. Great care should be taken with the need for, and the extent of, retrenchment in inventory and employees.

During economic downturns, firms file for bankruptcy in an effort to attempt a “turnaround.” The objective of this study is to assess the effectiveness of retrenchment strategies in the context of bankruptcy, as the most severe form of crisis. We conducted a longitudinal analysis of a sample of 868 bankrupt Spanish firms during the period 2004–2017. The empirical results show that stakeholder support and deep cost retrenchment increase the likelihood of survival and performance recovery, while aggressive layoffs are detrimental for turning bankrupt firms around. Surprisingly, intense asset retrenchment had no significant effects on firm survival and also pushed performance downward. The findings suggest that retrenchment should not be regarded as a general remedy for firms suffering the most severe of crisis. Bankrupt firms should focus on restoring stakeholder relationships and reducing superfluous expenses, while making employees redundant or selling assets should be evaluated carefully when attempting a turnaround. JEL CLASSIFICATION M10; G33

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Firm survival, bankruptcy, and turnaround are of great interest nowadays. Bankruptcy is the ultimate resource for a company to survive when it is affected by a severe decline. Thus, determinants of firm turnaround and survival in the context of bankruptcy are of interest to researchers, managers, and policy-makers. Prior turnaround literature has broadly studied firm-specific factors for turnaround success. However, location-specific factors remain relatively unstudied despite their increasing relevance. Thus, this paper aims to evaluate the existence of spatial dependence on the outcome of the bankruptcy procedure. Economic geography and business literature suggest that location matters and closer companies behave similarly to further ones. For this purpose, we designed a longitudinal analysis employing spatial correlation techniques. The analyses were conducted on a sample of 862 Spanish bankrupt firms (2004–2017) at a regional level (province). For overcoming the limitations of the broadly usually logistic model employed for the turnaround context, the Moran’s Index and the Local Association Index (LISA) were applied with gvSIG and GeoDa software. The empirical results show that the predictors GDP per capita and manufacturing specialization are related to higher bankruptcy survival rates. Both characteristics tend to be present in the identified cluster of provinces with better outcomes located in the North of Spain. We suggest that location broadly impacts the likelihood of the survival of a bankrupt firm, which can condition the strategic decision of locating in one region or another. Our findings provide policy-makers, managers, and researchers with relevant contributions and future investigation lines.

En periodos de crisis económica es habitual que las empresas se acojan al concurso de acreedores para superar una situación de declive e insolvencia. En el presente trabajo se evalúa la efectividad de las acciones estratégicas de recuperación en el contexto de crisis empresarial de mayor gravedad, como es la situación del concurso de acreedores. A tal fin, se ha efectuado un análisis longitudinal sobre una muestra de 868 empresas españolas declaradas en concurso de acreedores en el periodo 2004-2017. Los resultados revelan que incrementar las ventas contribuye de forma positiva a superar el proceso concursal de forma exitosa, esto es, sobreviviendo y mejorando la rentabilidad, mientras que efectuar inversiones en activo no muestra efectos significativos en el incremento de probabilidad de supervivencia y éxito. Las empresas exitosas adicionalmente adoptaron acciones de recortes de costes y activos con las que pudieron obtener los recursos necesarios para impulsar su negocio incluso durante el concurso de acreedores. Estos hallazgos sugieren que las empresas en situación de concurso de acreedores deberían adoptar estrategias de recuperación focalizadas en sus ventas, para lo cual será necesario que previamente hayan adoptado acciones de reducción de activos improductivos y gastos superfluos, que proporcionen la base para la posterior recuperación.