Fostering SME survival through insolvency proceedings: a legitimacy perspective on retrenchment, age, and firm-specific distress

This study examines the interaction between insolvency proceedings and strategic variables and their relationship with firm survival. Unlike previous research, this study considers the firm's legal status, including insolvency proceedings, and fills a gap in the literature by considering legal considerations in business studies. Adopting a legitimacy perspective, we employ a Cox proportional hazards model to construct a survival model based on a theoretical framework encompassing insolvency proceedings retrenchment, firm age, and causes of financial distress. Our sample consists of French SMEs facing financial difficulties. The findings reveal that initiating insolvency proceedings is negatively associated with firm survival. However, retrenchment of employees or assets during insolvency proceedings is associated with a higher likelihood of survival. Contrary to expectations, firm age showed a negative association with firm survival during the insolvency proceedings. Moreover, the study revealed a positive association between insolvency proceedings and firm survival in cases of firm-specific financial distress. This research provides new insights into the relationship between insolvency proceedings and firm survival. What are the conditions for an SME to survive insolvency proceedings? This study addresses this question by investigating the interaction between insolvency proceedings and the various factors that influence a firm's ability to survive. It fills a gap in the literature by considering the firm's legal situation, which offers a new context for action in the case of insolvency. The study finds that starting insolvency proceedings negatively affects a firm's survival, but retrenchment of employees or assets during proceedings can improve the chances of survival. Surprisingly, the study finds that firm age negatively impacts firm survival during proceedings. However, insolvency proceedings have a more favorable effect on firm survival in cases of firm-specific financial distress. The findings have practical implications for executives and boards as the outcome of a retrenchment strategy may vary based on whether it is executed in or outside of court, and insolvency proceedings can provide legitimacy for specific strategies.