Corporate turnaround and financial distress

Abstract

PurposeDrawing on variables cited in the turnaround literature, this study aims to explore whether information contained within annual reports is useful in distinguishing between distressed companies that enact a turnaround and those that fail.Design/methodology/approachThis study develops a discriminant model to identify distressed companies that have turnaround potential.FindingsAnalysis of the results reveals that successful turnarounds are associated with the severity of the distressed state, its determinants, with the extent of change in the distressed state since the previous year, and firm size.Originality/valueThis article is of use in identifying what information is useful in annual reports.

Corporate distress and turnaround: integrating the literature and directing future research

“…Pearce (2007) offers another definition, with a three-phase model including ''decline,'' ''redirection,'' and ''reestablishment.'' Consequently, Smith and Graves (2005) illustrate the lack of consensus between researchers regarding what constitutes a turnaround situation, or turnaround success, with respect to timing. As the framework used in the article at hand focuses on turnaround strategies' implementation, the process dimension is subdivided into ''retrenchment'' and ''recovery'' (Barker and Duhaime 1997).…”

“…This type of secured financing for firms under Chapter 11 bankruptcy enables investments, thus increasing firms' chances for survival. Acquiring new resources positively affects firms' recovery (Morrow et al 2007;Smith and Graves 2005;Wu 2013). However, the positive effect is limited to true investments.…”

“…The finance research field offers the majority of publications on overleveraging as a cause of crisis, finding positive correlations between the severity of financial distress and default probability (Campbell et al 2008;Ofek 1993;Pandit 2000;Smith and Graves 2005). Campello et al (2010) argue that firms with tight credit constraints inevitably plan deeper retrenchments regarding technology and capital investments, and are forced to lay off more staff, leading to an inability to achieve long-term profitability after the immediate distress situation.…”

“…This lack of longitudinal restructuring research hinders scholars to effectively link restructuring content to the process (Pettigrew 2012). Additionally, various scholars note a lack of consistency regarding clearly defined restructuring time frames (Smith and Graves 2005;Stopford and Baden-Fuller 1990). As Chowdhury (2002) points out that allowing for a certain time span is critical, as most restructuring actions yield lagged results.…”

A Review of Critical Success Factors Which Drives the Performance of Micro, Small and Medium Enterprises

“…For example, cost cutting measures applied by a struggling company during a scheme of business reorganisation can result in performance improvement and therefore recovery of the business (Smith & Graves, 2005;Alfaro, Ortiz & Poler, 2007;Laitinen, 2011). Cost control is also considered a critical success factor by Feindt, et al (2002).…”