Financial distress and corporate restructuring: a case study
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Published
31-05-2023
María-José Palacín-Sánchez
Artur Alencar-García Francisco-Javier Canto-Cuevas
https://orcid.org/0000-0003-0246-2551
Artur Alencar-García Francisco-Javier Canto-Cuevas
Abstract
This article analyses the turnaround strategies that can help a company to recover from a situation of financial distress. This study presents an innovative dynamic approach that follows the financial distress lifecycle from its beginning to its resolution while focusing on the Spanish context, which differs from the Anglo-Saxon context traditionally considered in previous studies. The methodology of the case study is employed in order to explore, on an in-depth basis, the features of the resolution of financial distress situations. To this end, the single case of a large Spanish listed company is examined over the period of 2008 to 2017. Our case study shows that the company undertook a wide range of restructuring strategies at a private level that are usually applied by distressed firms. However, for a long time, the company largely focused on debt restructuring. This lengthening of the restructuring process coupled with a weak recovery suggests a system for solving the situations of corporate financial distress that is not agile and that may also be relatively inefficient. The findings provide valuable support for practitioners in developing a successful restruct
How to Cite
Palacín-Sánchez, M.-J., Alencar-García, A., & Canto-Cuevas, F.-J. (2023). Financial distress and corporate restructuring: a case study. Cuadernos De Gestión, 23(2), 81–91. https://doi.org/10.5295/cdg.221759fc
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Keywords
Financial distress, Corporate restructuring, Recovery strategies, Corporate turnaround, Case study, Spanish context
References
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Anghel, I., Enache, C., & Merino, F. (2020). Macroeconomic determinants of corporate failures. Evidence from Romania and Spain. Journal of Business Economics and Management, 218(3), 743-759. https://doi.org/10.3846/jbem.2020.12217
Asquith, P., Gertner, R. & Scharfstein, D. (1994). Anatomy of financial distress: An examination of junk-bond issuers. The Quarterly Journal of Economics, 109(3), 625-658. https://doi.org/10.2307/2118416
Atanassov, J., & Kim, E. H. (2009). Labor and corporate governance: International evidence from restructuring decisions. The Journal of Finance, 64(1), 341-374. https://doi.org/10.1111/j.1540-6261.2008.01436.x
Crespí-Cladera, R., & Garcia-Cestona, M. A. (2002). Ownership and control of the Spanish listed firms. In F. Barca & M. Becht (Eds.), The Control of Corporate Europe (pp. 207-227). Oxford University Press, London.
Cuadrado Roura, J. R., López Morales, J. M., Crecente Romero, F.J., León Navarro, M. & Pérez de Armiñán y de la Serna, A. (2010). El sector construcción en España: Análisis, perspectivas y propuestas. Cuadernos del Colegio Libre de Eméritos. http://www.colegiodeemeritos.es/CUADERNOSDELCOLEGIO_InformeConstruccionEspana/seccion=78&idioma=es_ES&id=2010071910510001&activo=1.do
Davydenko, S. A., & Franks, J. R. (2008). Do bankruptcy codes matter? A study of defaults in France, Germany, and the UK. The Journal of Finance, 63(2), 565-608. https://doi.org/10.1111/j.1540-6261.2008.01325.x
DeAngelo, H., & DeAngelo, L. (1990). Dividend policy and financial distress: An empirical investigation of troubled NYSE firms. The Journal of Finance, 45(5), 1415-1431. https://doi.org/10.1111/j.1540-6261.1990.tb03721.x
De Jong A., Kabir, R. & Nguyen, T. (2008). Capital structure around the world: the roles of firm- and country-specific determinants. Journal of Banking and Finance, 32, 1954-1969. https://doi.org/10.1016/j.jbankfin.2007.12.034
Denis, D. K., & Rodgers, K. J. (2007). Duration, outcome, and post-reorganization performance. Journal of Financial and Quantitative Analysis, 42(1), 101-118. https://doi.org/10.1017/S0022109000002209
Duh, R. R., Lin, T. W., Wang, W. Y., & Huang, C. H. (2009). The design and implementation of activity‐based costing: A case study of a Taiwanese textile company. International Journal of Accounting & Information Management, 17(1), 27-52. https://doi.org/10.1108/18347640910967726
Franks, J. R., Nyborg, K.G. & Torous, W.N. (1996). A comparison of US, UK, and German insolvency codes. Financial Management, 25(3), 86-101. https://doi.org/10.2307/3665810
Franks, J. R., & Sussman, O. (2005). Financial distress and bank restructuring of small to medium size UK companies. Review of Finance, 9, 65-96. https://doi.org/10.1007/s10679-005-2988-8
García-Posada, M., & Mora-Sanguinetti, J. S. (2012). El uso de los concursos de acreedores en España. Boletín Económico del Banco de España, diciembre 27-38. https://repositorio.bde.es/bitstream/123456789/897/1/be1212-art3.pdf
García-Posada, M., & Mora-Sanguinetti, J. S. (2014). Are there alternatives to bankruptcy? A study of small business distress in Spain. SERIEs, 5(2), 287-332. https://doi.org/10.1007/s13209-014-0109-7
García-Posada, M., & Vegas, R. (2018). Bankruptcy reforms in the midst of the Great Recession: The Spanish expe-rience. International Review of Law and Economics, 55, 71-95. https://doi.org/10.1016/j.irle.2018.04.001
Gilson, S. C. (1990). Bankruptcy, boards, banks, and blockholders: Evidence on changes in corporate ownership and control when firms default. Journal of financial economics, 27(2), 355-387. https://doi.org/10.1016/0304-405X(90)90060-D
Gilson, S.C. (2010). Creating Value Through Corporate Restructuring. John Wiley & Sons, New Jersey.
Gilson, S. C., John, K. & Lang, L.H. (1990). Troubled debt restructurings: An empirical study of private reorganization of firms in default. Journal of financial economics, 27(2), 315-353. https://doi.org/10.1016/0304-405X(90)90059-9
Gilson, S. C., & Vetsuypens, M.R. (1993). CEO compensation in financially distressed firms: An empirical analysis. The Journal of Finance, 48(2), 425-458. https://doi.org/10.1111/j.1540-6261.1993.tb04722.x
Gomes-Mariano, S. S., Izadi, J., & Pratt, M. (2021). Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing? International Journal of Accounting & Information Management, 29(2), 305-323. https://doi.org/10.1108/IJAIM-08-2020-0130
Green, R. C. (1984). Investment incentives, debt, and warrants. Journal of financial Economics, 13(1), 115-136. https://doi.org/10.1016/0304-405X(84)90034-5
Hogan, J., & Lodhia, S. (2011). Sustainability reporting and reputation risk management: an Australian case study. International Journal of Accounting & Information Management, 19(3), 267-287. https://doi.org/10.1108/18347641111169269
Holder-Webb, L., Lopez, T. J., & Regier, P. R. (2005). The performance consequences of operational restructurings. Review of Quantitative Finance and Accounting, 25(4), 319-339. https://doi.org/10.1007/s11156-005-5458-7
Hotchkiss, E. S., John, K., Mooradian, R.M. & Thorburn, K.S. (2008). Bankruptcy and the resolution of financial distress. In B. E. Eckbo, Handbook of empirical corporate finance (pp. 235-287). Elsevier.
International Monetary Fund. Research Department. (2012). World Economic Outlook, April 2012: Growth Resuming, Dangers Remain. International Monetary Fund.
Jiménez, M. (2011, October 20). Del Rivero es destituido como presidente de Sacyr. https://elpais.com/economia/2011/10/20/actualidad/1319095975_850215.html
Jostarndt, P. (2007). Financial Distress, Corporate Restructuring and Firm Survival. An Empirical Analysis of German Panel Data. Deutscher Universitäts-Verlag| GWV Fachverlage GmbH, Munich. https://doi.org/10.1007/978-3-8350-9437-6
Kam, A., Citron, D. & Muradoglu, G. (2010). Financial distress resolution in China–two case studies. Qualitative Rese-arch in Financial Market, 2(2), 46-79. https://doi.org/10.1108/17554171011053667
Koh, S., Durand, R.B., Dai, L. & Chang, M. (2015). Financial distress: Lifecycle and corporate restructuring. Journal of Corporate Finance, 33, 19-33. https://doi.org/10.1016/j.jcorpfin.2015.04.004
Krajewski, J., Tokarski, A. & Tokarski, M. (2020). The analysis of the bankruptcy of enterprises exemplified by the Vise-grad Group. Journal of Business Economics and Management, 21(2), 593-609. https://doi.org/10.3846/jbem.2020.12232
Lohrke, F., Bedeian, A. & Palmer, T. (2004). The role of top management teams in formulating and implementing turnaround strategies: A review and research agenda. International J. of Management Reviews, 5(6), 63-90. https://doi.org/10.1111/j.1460-8545.2004.00097.x
Mangena, M., Priego, A.M. & Manzaneque, M. (2020). Bank power, block ownership, boards and financial distress likelihood: An investigation of Spanish listed firms. Journal of Corporate Finance, 64, 1-22. https://doi.org/10.1016/j.jcorpfin.2020.101636
Martín-García, R. & González-Arias, J. (2011). Análisis estratégico de la industria de la construcción en España. Mana-gement Letters/Cuadernos de gestión, 11(1), 141-161.
Ortega-Regato, E., & Peñalosa-Ruiz, J. M. (2012). Claves de la crisis económica española y retos para crecer en la UEM. Documentos ocasionales/Banco de España, 1201.
Padilla, A. J., & Requejo, A. (1999). Conflicts of interest, employment decisions, and debt restructuring: evidence from Spanish firms in financial distress. Working Paper 99-67. Business Economics Series 16. http://hdl.handle.net/10016/6432
Palacín-Sánchez, M. J., & Di Pietro, F. (2016). The role of the regional financial sector in the capital structure of small and medium-sized enterprises (SMEs). Regional Studies, 50(7), 1232-1247. https://doi.org/10.1080/00343404.2014.1000290
Pandit, N. R. (2000). Some recommendations for improved research on corporate turnaround. Management, 3, 31–56. https://management-aims.com/index.php/mgmt/article/view/4178
El Periódico (2014, enero 6). Quién es quiénen SACYR. https://www.elperiodico.com/es/economia/20140106/sacyr-accionariado-consejo-de-administracion-2986609
Rico, M., Naresh R., Pandit, N.R., & Puig, F. (2020). SME insolvency, bankruptcy, and survival: an examination of re-trenchment strategies. Small Business Economics, 1-16. https://doi.org/10.1007/s11187-019-00293-z
Sacyr, S. A. (2018). Presentación Sacyr 2018. Madrid. http://www.sacyr.com/es_es/empresa-global/actividad-corporativa/default.aspx
Sanz, L. J., & Ayca, J. (2006). Financial distress costs in Latin America: A case study. Journal of Business Research, 59(3), 394-395. https://doi.org/10.1016/j.jbusres.2005.09.014
Schweizer, L., & Nienhaus, A. (2017). Corporate distress and turnaround: integrating the literature and directing future research. Business Research, 10, 3-47. https://doi.org/10.1007/s40685-016-0041-8
Shleifer, A., & Vishny, R.W. (1992). Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, 47 (4), 1343-1366. https://doi.org/10.1111/j.1540-6261.1992.tb04661.x
Slatter, S. (1984). Corporate Recovery: Successful Turnaround Strategies and Their Implementation. Penguin, Har-mondsworth, UK.
Stanghellini, L., Mokal, R., Paulus, C.G. & Tirado, I. (2018). Best Practices In European Restructuring-Contractualised Distress Resolution in the Shadow of the Law. SSRN 3271790.
Stein, J. C. (1992). Convertible bonds as backdoor equity financing. Journal of financial economics, 32(1), 3-21. https://doi.org/10.1016/0304-405X(92)90022-P
Sudarsanam, S., & Lai, J. (2001). Corporate financial distress and turnaround strategies: An empirical analysis. British Journal of Management, 12(3), 183-199. https://doi.org/10.1111/1467-8551.00193
Tirado, I. (2018). Contractualised Distress Resolution in the Shadow of the Law. National findings for Spain. Project funding by the European Union, www.codire.eu
Wruck, K. H. (1990). Financial distress, reorganization, and organizational efficiency. Journal of Financial Economics, 27(2), 419-444. https://doi.org/10.1016/0304-405X(90)90063-6
Yin, R. K. (1984). Case study research: Design and methods. SAGE Publications.
Zainal, Z. (2007). Case study as a research method. Jurnal Kemanusiaan, 5(1). https://jurnalkemanusiaan.utm.my/index.php/kemanusiaan/article/view/165
Anghel, I., Enache, C., & Merino, F. (2020). Macroeconomic determinants of corporate failures. Evidence from Romania and Spain. Journal of Business Economics and Management, 218(3), 743-759. https://doi.org/10.3846/jbem.2020.12217
Asquith, P., Gertner, R. & Scharfstein, D. (1994). Anatomy of financial distress: An examination of junk-bond issuers. The Quarterly Journal of Economics, 109(3), 625-658. https://doi.org/10.2307/2118416
Atanassov, J., & Kim, E. H. (2009). Labor and corporate governance: International evidence from restructuring decisions. The Journal of Finance, 64(1), 341-374. https://doi.org/10.1111/j.1540-6261.2008.01436.x
Crespí-Cladera, R., & Garcia-Cestona, M. A. (2002). Ownership and control of the Spanish listed firms. In F. Barca & M. Becht (Eds.), The Control of Corporate Europe (pp. 207-227). Oxford University Press, London.
Cuadrado Roura, J. R., López Morales, J. M., Crecente Romero, F.J., León Navarro, M. & Pérez de Armiñán y de la Serna, A. (2010). El sector construcción en España: Análisis, perspectivas y propuestas. Cuadernos del Colegio Libre de Eméritos. http://www.colegiodeemeritos.es/CUADERNOSDELCOLEGIO_InformeConstruccionEspana/seccion=78&idioma=es_ES&id=2010071910510001&activo=1.do
Davydenko, S. A., & Franks, J. R. (2008). Do bankruptcy codes matter? A study of defaults in France, Germany, and the UK. The Journal of Finance, 63(2), 565-608. https://doi.org/10.1111/j.1540-6261.2008.01325.x
DeAngelo, H., & DeAngelo, L. (1990). Dividend policy and financial distress: An empirical investigation of troubled NYSE firms. The Journal of Finance, 45(5), 1415-1431. https://doi.org/10.1111/j.1540-6261.1990.tb03721.x
De Jong A., Kabir, R. & Nguyen, T. (2008). Capital structure around the world: the roles of firm- and country-specific determinants. Journal of Banking and Finance, 32, 1954-1969. https://doi.org/10.1016/j.jbankfin.2007.12.034
Denis, D. K., & Rodgers, K. J. (2007). Duration, outcome, and post-reorganization performance. Journal of Financial and Quantitative Analysis, 42(1), 101-118. https://doi.org/10.1017/S0022109000002209
Duh, R. R., Lin, T. W., Wang, W. Y., & Huang, C. H. (2009). The design and implementation of activity‐based costing: A case study of a Taiwanese textile company. International Journal of Accounting & Information Management, 17(1), 27-52. https://doi.org/10.1108/18347640910967726
Franks, J. R., Nyborg, K.G. & Torous, W.N. (1996). A comparison of US, UK, and German insolvency codes. Financial Management, 25(3), 86-101. https://doi.org/10.2307/3665810
Franks, J. R., & Sussman, O. (2005). Financial distress and bank restructuring of small to medium size UK companies. Review of Finance, 9, 65-96. https://doi.org/10.1007/s10679-005-2988-8
García-Posada, M., & Mora-Sanguinetti, J. S. (2012). El uso de los concursos de acreedores en España. Boletín Económico del Banco de España, diciembre 27-38. https://repositorio.bde.es/bitstream/123456789/897/1/be1212-art3.pdf
García-Posada, M., & Mora-Sanguinetti, J. S. (2014). Are there alternatives to bankruptcy? A study of small business distress in Spain. SERIEs, 5(2), 287-332. https://doi.org/10.1007/s13209-014-0109-7
García-Posada, M., & Vegas, R. (2018). Bankruptcy reforms in the midst of the Great Recession: The Spanish expe-rience. International Review of Law and Economics, 55, 71-95. https://doi.org/10.1016/j.irle.2018.04.001
Gilson, S. C. (1990). Bankruptcy, boards, banks, and blockholders: Evidence on changes in corporate ownership and control when firms default. Journal of financial economics, 27(2), 355-387. https://doi.org/10.1016/0304-405X(90)90060-D
Gilson, S.C. (2010). Creating Value Through Corporate Restructuring. John Wiley & Sons, New Jersey.
Gilson, S. C., John, K. & Lang, L.H. (1990). Troubled debt restructurings: An empirical study of private reorganization of firms in default. Journal of financial economics, 27(2), 315-353. https://doi.org/10.1016/0304-405X(90)90059-9
Gilson, S. C., & Vetsuypens, M.R. (1993). CEO compensation in financially distressed firms: An empirical analysis. The Journal of Finance, 48(2), 425-458. https://doi.org/10.1111/j.1540-6261.1993.tb04722.x
Gomes-Mariano, S. S., Izadi, J., & Pratt, M. (2021). Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing? International Journal of Accounting & Information Management, 29(2), 305-323. https://doi.org/10.1108/IJAIM-08-2020-0130
Green, R. C. (1984). Investment incentives, debt, and warrants. Journal of financial Economics, 13(1), 115-136. https://doi.org/10.1016/0304-405X(84)90034-5
Hogan, J., & Lodhia, S. (2011). Sustainability reporting and reputation risk management: an Australian case study. International Journal of Accounting & Information Management, 19(3), 267-287. https://doi.org/10.1108/18347641111169269
Holder-Webb, L., Lopez, T. J., & Regier, P. R. (2005). The performance consequences of operational restructurings. Review of Quantitative Finance and Accounting, 25(4), 319-339. https://doi.org/10.1007/s11156-005-5458-7
Hotchkiss, E. S., John, K., Mooradian, R.M. & Thorburn, K.S. (2008). Bankruptcy and the resolution of financial distress. In B. E. Eckbo, Handbook of empirical corporate finance (pp. 235-287). Elsevier.
International Monetary Fund. Research Department. (2012). World Economic Outlook, April 2012: Growth Resuming, Dangers Remain. International Monetary Fund.
Jiménez, M. (2011, October 20). Del Rivero es destituido como presidente de Sacyr. https://elpais.com/economia/2011/10/20/actualidad/1319095975_850215.html
Jostarndt, P. (2007). Financial Distress, Corporate Restructuring and Firm Survival. An Empirical Analysis of German Panel Data. Deutscher Universitäts-Verlag| GWV Fachverlage GmbH, Munich. https://doi.org/10.1007/978-3-8350-9437-6
Kam, A., Citron, D. & Muradoglu, G. (2010). Financial distress resolution in China–two case studies. Qualitative Rese-arch in Financial Market, 2(2), 46-79. https://doi.org/10.1108/17554171011053667
Koh, S., Durand, R.B., Dai, L. & Chang, M. (2015). Financial distress: Lifecycle and corporate restructuring. Journal of Corporate Finance, 33, 19-33. https://doi.org/10.1016/j.jcorpfin.2015.04.004
Krajewski, J., Tokarski, A. & Tokarski, M. (2020). The analysis of the bankruptcy of enterprises exemplified by the Vise-grad Group. Journal of Business Economics and Management, 21(2), 593-609. https://doi.org/10.3846/jbem.2020.12232
Lohrke, F., Bedeian, A. & Palmer, T. (2004). The role of top management teams in formulating and implementing turnaround strategies: A review and research agenda. International J. of Management Reviews, 5(6), 63-90. https://doi.org/10.1111/j.1460-8545.2004.00097.x
Mangena, M., Priego, A.M. & Manzaneque, M. (2020). Bank power, block ownership, boards and financial distress likelihood: An investigation of Spanish listed firms. Journal of Corporate Finance, 64, 1-22. https://doi.org/10.1016/j.jcorpfin.2020.101636
Martín-García, R. & González-Arias, J. (2011). Análisis estratégico de la industria de la construcción en España. Mana-gement Letters/Cuadernos de gestión, 11(1), 141-161.
Ortega-Regato, E., & Peñalosa-Ruiz, J. M. (2012). Claves de la crisis económica española y retos para crecer en la UEM. Documentos ocasionales/Banco de España, 1201.
Padilla, A. J., & Requejo, A. (1999). Conflicts of interest, employment decisions, and debt restructuring: evidence from Spanish firms in financial distress. Working Paper 99-67. Business Economics Series 16. http://hdl.handle.net/10016/6432
Palacín-Sánchez, M. J., & Di Pietro, F. (2016). The role of the regional financial sector in the capital structure of small and medium-sized enterprises (SMEs). Regional Studies, 50(7), 1232-1247. https://doi.org/10.1080/00343404.2014.1000290
Pandit, N. R. (2000). Some recommendations for improved research on corporate turnaround. Management, 3, 31–56. https://management-aims.com/index.php/mgmt/article/view/4178
El Periódico (2014, enero 6). Quién es quiénen SACYR. https://www.elperiodico.com/es/economia/20140106/sacyr-accionariado-consejo-de-administracion-2986609
Rico, M., Naresh R., Pandit, N.R., & Puig, F. (2020). SME insolvency, bankruptcy, and survival: an examination of re-trenchment strategies. Small Business Economics, 1-16. https://doi.org/10.1007/s11187-019-00293-z
Sacyr, S. A. (2018). Presentación Sacyr 2018. Madrid. http://www.sacyr.com/es_es/empresa-global/actividad-corporativa/default.aspx
Sanz, L. J., & Ayca, J. (2006). Financial distress costs in Latin America: A case study. Journal of Business Research, 59(3), 394-395. https://doi.org/10.1016/j.jbusres.2005.09.014
Schweizer, L., & Nienhaus, A. (2017). Corporate distress and turnaround: integrating the literature and directing future research. Business Research, 10, 3-47. https://doi.org/10.1007/s40685-016-0041-8
Shleifer, A., & Vishny, R.W. (1992). Liquidation values and debt capacity: A market equilibrium approach. The Journal of Finance, 47 (4), 1343-1366. https://doi.org/10.1111/j.1540-6261.1992.tb04661.x
Slatter, S. (1984). Corporate Recovery: Successful Turnaround Strategies and Their Implementation. Penguin, Har-mondsworth, UK.
Stanghellini, L., Mokal, R., Paulus, C.G. & Tirado, I. (2018). Best Practices In European Restructuring-Contractualised Distress Resolution in the Shadow of the Law. SSRN 3271790.
Stein, J. C. (1992). Convertible bonds as backdoor equity financing. Journal of financial economics, 32(1), 3-21. https://doi.org/10.1016/0304-405X(92)90022-P
Sudarsanam, S., & Lai, J. (2001). Corporate financial distress and turnaround strategies: An empirical analysis. British Journal of Management, 12(3), 183-199. https://doi.org/10.1111/1467-8551.00193
Tirado, I. (2018). Contractualised Distress Resolution in the Shadow of the Law. National findings for Spain. Project funding by the European Union, www.codire.eu
Wruck, K. H. (1990). Financial distress, reorganization, and organizational efficiency. Journal of Financial Economics, 27(2), 419-444. https://doi.org/10.1016/0304-405X(90)90063-6
Yin, R. K. (1984). Case study research: Design and methods. SAGE Publications.
Zainal, Z. (2007). Case study as a research method. Jurnal Kemanusiaan, 5(1). https://jurnalkemanusiaan.utm.my/index.php/kemanusiaan/article/view/165
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