Resolving a dilemma of signaling bankrupt‐firm emergence: A dynamic integrative view

Abstract

Research summary: Predicting the emergence of bankrupt firms relying on firm signals involves a stigma-related dilemma. On the one hand, bankrupt firms tend to send positive signals through restructuring to decouple themselves from the stigma of bankruptcy. On the other hand, the preexistence of the bankruptcy stigma may reduce the signaling effectiveness of firms' restructuring efforts, making the outcome prediction difficult. We address this dilemma by developing a dynamic integrative view to extend signaling theory, arguing that subsequent signals from key external stakeholders can effectively help evaluate bankrupt firms' quality and reduce the ambiguity in interpreting firms' restructuring signals. Using a sample of U.S. public bankrupt firms under Chapter 11 reorganization, we find evidence supporting the argument.Managerial summary: Applications of signaling theory to predict reorganization outcomes are in their infancy. The dynamic integrative framework developed in this study is useful in identifying different types of signals and predicting outcomes of firms in crisis. The results of this study can be useful for various decision makers to predict the turnaround potential of bankrupt firms. Our results show that an increase in alliance partners, institutional investors, and securities analysts following a bankrupt firm predicts the firm's reorganization outcome. Moreover, firms that are able to gain positive attention from key stakeholders will also gain positive interpretations of their strategic efforts. Signals from alliance partners and institutional investors amplify the signaling effect of a firm's de-diversification effort in predicting its reorganization outcome.

Strategic responses to crisis

“…Importantly, as prior research suggests, exits can be an important foundation for strategic renewal (Ren, Hu, & Cui, 2019), as they free up committed resources and, therefore, contribute to the formation of new ventures (Carnahan, 2017). Therefore, although exits are not costless (Moulton & Thomas, 1993) and potentially leave a stigma of -business failure‖ (Xia, Dawley, Jiang, Ma, & Boal, 2016), such responses may not necessarily be the end of the road.…”

CEO turnover and bankrupt firms’ emergence

“…Despite these attempts to survive bankruptcy proceedings, many Chapter 11 firms fail to reemerge from the reorganization process (Hotchkiss, John, Mooradian, & Thorburn, 2008). Although higher‐quality firms are generally thought to be more likely to emerge (Daily, 1994; Lee, Peng, & Barney, 2007; Xia et al., 2016), the outcomes of bankruptcy proceedings are difficult to predict. That is because the firm quality is not readily observable by outsiders due to the significant information asymmetry, which is further exacerbated by financial distress (Evans et al., 2014; Kahl, 2002; Mooradian, 1994).…”

“…More than 7,000 bankruptcy cases are filed annually under Chapter 11 of the US Bankruptcy Code for reorganization, with hundreds of thousands additional cases filed around the globe (Gerdano & Flynn, 2018; Xia, Dawley, Jiang, Ma, & Boal, 2016). Whether a firm can reemerge from bankruptcy proceedings can significantly impact various stakeholder groups (Altman, 1984; Cremers, Nair, & Peyer, 2008; Trahms, Ndofor, & Sirmon, 2013), including employees (Alaka, 2006; Bae, Kang, & Wang, 2011; Graham, Kim, Li, & Qiu, 2015; Ponoroff, 1994), suppliers (Benerjee, Dasgupta, & Kim, 2008; Boone & Ivanov, 2012; Brown, Fee, & Thomas, 2009; Chu, 2012), customers (Hortaçsu, Matvos, Syverson, & Venkataraman, 2013; Kale & Shahrur, 2007; Kale, Meneghetti, & Shahrur, 2013; Lian, 2017), business partners (Boone & Ivanov, 2012), and local communities (Alaka, 2006; Bae et al., 2011; Graham et al., 2015; Ponoroff, 1994).…”

It Depends on the Size: How Firm Strategic Emphasis on Digital Transformation Predicts Market Capitalization

“…We faced the problem of missing data [34,36,37], especially with respect to firm financial data and Research & Development (R&D) expenditures. Our sample was further reduced because we used lagged values (t-1) for all our independent variables [38][39][40], as prior research has shown, that capital markets usually need some time to incorporate the available firm information [41,42]. Hence, our final sample comprised 1,203 firm-year observations.…”