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Guilherme Fowler A. Silvia Morales de Q. Leandro S. We investigate the influence of bankruptcy reorganization plans on the recovery of distressed firms. Using qualitative comparative analysis QCA , specifically, we perform an in-depth investigation of a set of reorganization plans submitted by publicly traded companies in Brazil. We also find that the absence of a good industry analysis is a critical condition for a reorganization plan to fail.

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Guilherme Fowler A. Silvia Morales de Q. Leandro S. We investigate the influence of bankruptcy reorganization plans on the recovery of distressed firms. Using qualitative comparative analysis QCA , specifically, we perform an in-depth investigation of a set of reorganization plans submitted by publicly traded companies in Brazil.

We also find that the absence of a good industry analysis is a critical condition for a reorganization plan to fail. We discuss the theoretical and managerial implications of these findings.

When a company faces failure in business, it usually follows one of two paths. The firm may seek an out-of-court agreement with its creditors, or it may go bankrupt. In the latter case, the firm may file for a liquidation bankruptcy, meaning that it ceases its operations and agrees to dispose of its assets so that the creditors receive at least a portion of the amount they are owed.

Alternatively, the company may file for a reorganization bankruptcy. Therefore, one of the most important elements of reorganization bankruptcy is reorganization plans. If a plan is consistent, there are chances for the company to restructure itself and overcome the crisis. If a plan is inconsistent, represents only pages devoid of meaning, and has the sole purpose of meeting legal prerequisites, then the recovery of the company can never occur.

Given the role of reorganization plans in the recovery of distressed firms, we perform an exploratory analysis of the strategic components of the plans. Our main objective is to identify the most prominent strategic elements of bankruptcy reorganization plans and how they connect to firm performance.

To accomplish this task, we perform an in-depth investigation of a set of plans, linking its strategic components to the performance of firms under reorganization bankruptcy by means of a qualitative comparative analysis QCA.

We develop our study in Brazil. The country has a history of crises, which makes it an interesting case to analyze the issue. For example, Brazil is famously known for economic volatility in a context of high inflation rates in the s and s.

More recently, a combination of political and economic issues plunged the country into a severe crisis in the aftermath of the global meltdown of The first, called the pre-awareness moment, occurred in the first half of During this period, citizens did not have a clear understanding of the depth and breadth of the crisis. From June when the bankruptcy law in force was passed in Brazil until September , there were 60, reorganization bankruptcy requests granted by the courts in the country.

In this paper, we develop our argument in two steps. First, we examine the theoretical aspects of reorganization bankruptcy and outline a simple model of the strategic components of a reorganization plan. Second, we present our empirical analysis, describing the sample, the variables and the fuzzy-set QCA methodology.

The results above make two important contributions to the literature. First, we expand the debate on business turnaround and reorganization bankruptcy by shedding light on an antecedent that has not yet received much attention, namely the bankruptcy reorganization plan. Second, by mapping the strategic components of reorganization plans, we develop a holistic view of the strategic building process. When a company goes into reorganization bankruptcy, its leaders generally formulate a turnaround strategy hoping to convince investors and creditors that the return to profitability is achievable.

Specifically examining the turnaround process, Pearce and Robbins divide it into two stages: turnaround situation and turnaround response 1. The turnaround situation stage occurs when a firm faces multiple periods of decline in its financial performance after a relatively long, stable period of prosperity. Turnaround situations are caused by a combination of external and internal factors that may generate circumstances with different degrees of severity, ranging from a reduction in margins and sales to bankruptcy.

The turnaround response stage, in turn, can usually be divided into two phases: retrenchment and recovery 2. The primary objective of the retrenchment phase is to produce the financial stabilization of the company.

According to Pearce and DiLullo , the possibility of bankruptcy can be explicitly incorporated into the strategic planning of a firm when one contemplates the turnaround situation as a potential bankruptcy situation. Based on this argument, our basic claim in this paper is that the inclusion of a strategic planning exercise into the turnaround stage sheds light on another stage so far disregarded in the majority of turnaround discussions: the stage of reorganization plan formulation.

Thus, the reorganization plan is a key element of the turnaround process when it involves bankruptcy protection. The plan formulation phase takes place after the bankruptcy situation and precedes the turnaround response see Figure 1. Source: elaborated by the authors, based on Pearce, J. When a strategic plan includes bankruptcy. Business Horizons, 41 5 , Toward improved theory and research on business turnaround. Journal of Management, 19 3 , Subject to local jurisdiction, a company seeking bankruptcy protection has a specific number of days to present its reorganization plan, which has to be accepted by a precise number of creditors within each class of creditors 3.

In Brazil, the reorganization plan must be submitted within 60 days after the decision granting the judicial reorganization Lei no. Together with the creditors, the plan must also be confirmed by the court.

This type of assessment is performed in Brazil by the judge responsible for reviewing the request for judicial recovery see, for instance, Vaz, This is generally referred to as the feasibility test. The test does not require the guaranteed success of the plan. The firm must show only that there is reasonable assurance of compliance with the terms of the plan.

In other words, the test requires a demonstration of the likelihood of the plan will be accomplished, not its success Baldiga, In fact, a good reorganization plan is not itself a guarantee to uplift a company in crisis. However, the relevance of the present investigation should not be underestimated; the reorganization plan is the heart of the process of reorganization bankruptcy.

It is also the core element whose feasibility the court assesses to decide on the request for reorganization. In this sense, our study makes an explicit link between strategy and bankruptcy Daily, ; Sheppard, ; Trahms et al.

As stated, a reorganization plan is the document by which firm managers present their planning for the financial restructuring of the firm as well as the strategic rationale for the continuation of its operations. Because creditors and the court must approve a reorganization plan, the plan tends not to include sensitive strategic details as they may fall on the ears of competitors.

However, the plan should be detailed enough to convince stakeholders about the feasibility of recovery. The reorganization plan, therefore, is based on a delicate balance. The most apparent strategic element of a reorganization plan is the list of recovery means to be employed by the firm.

Such recovery means involve, but are not necessarily limited to, retrenchment actions - i. Another important element of the plan is the diagnosis of the factors that may have caused the crisis. It is expected that the means of recovery and the diagnosis maintain a close relationship with each other.

Focusing only on diagnosis and recovery means, however, can cover significant aspects. Put differently, a reorganization plan can be analyzed in itself, being a portrait of the company for its own management.

The ultimate goal of a reorganization plan is to pave the way for the firm to obtain or retrieve a sustainable competitive advantage.

Since the strategy of the firm does not occur in a vacuum, it goes without saying that planning for competitive advantage i. These ingredients are the intermediate steps, which connect the diagnosis of the crisis and the selection of recovery mechanisms. They are the internal gearing of the reorganization plan. From a theoretical perspective, and for the sake of simplicity, we focus on four fundamental strategic ingredients that can be described as an ordered list of assessments.

The first ingredient is the formulation of a diagnosis of the factors causing the crisis e. This step should not be overlooked because firm managers must be able to clearly articulate the competitive space in which the firm operates - especially because the reorganization plan will be scrutinized by the court, which does not necessarily have knowledge on the industry. The third step is to conduct an analysis of the competitive components of the industry Porter, and the internal resources of the firm e.

These elements allow managers to identify more clearly the competitive strengths and weaknesses of the company and thus formulate a coherent recovery strategy. Figure 2 summarizes these steps. We are not interested merely in the recovery means employed by companies. We want to understand how the design of a plan may affect the performance of the firm. Accordingly, taking as a reference the discussion on the strategic ingredients of reorganization plans, we now present our empirical analysis.

We base our investigation on reorganization plans developed by publicly traded companies in Brazil. To accomplish this task, we set up a unique database and develop a specific performance measure. Bankruptcy proceedings in Brazil were originally governed by Decree-Law No. With the deliberate intention to modernize, accelerate, and make the bankruptcy process more transparent, the New Brazilian Bankruptcy Law Lei no.

According to Funchal , following the enactment of Law No. Pursuant to the law, each application for bankruptcy reorganization in Brazil is associated with a reorganization plan; this represents the domain of interest for the present research.

It just so happens, however, that the vast majority of cases involves the reorganization of private companies. As a result, although reorganization plans are disclosed to creditors and plan discussion meetings are open to any person, it is not possible for researchers to obtain a hardcopy or an electronic copy of the plans of private companies 5. Thus, we focus our study on the reorganization plans of Brazilian public companies.

All companies have long been in operation, some of them centuries old. Most companies went public in the twentieth century. Firms have operations in various industries, particularly the textile and energy industries. They have regional, national, and international operations. Source: elaborated by the authors based on data obtained from bmfbovespa.

The reorganization plans of the companies described in Table 1 are the key input of our investigation. In line with the model presented in Figure 2 , we examine the contents of the plans regarding the diagnosis of the problem faced by the company, the definition of the relevant market, the identification of internal resources and competitive forces, and the articulation of the competitive strengths and weaknesses of the company.

Each reorganization plan was analyzed in depth by the three authors. Two steps were performed. First, the plans were assessed and their content was tabulated in each dimension of the analysis see Table 4.

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By Danilo Nogueira Professional translators, editors, consultants, trainers Brazil danilo. Become a member of TranslationDirectory. People, companies and even whole countries seem to be going insolvent left and right these days, so I thought something on insolvency and bankruptcy would be in order. Who knows what we will have to translate tomorrow—if we are not bankrupt ourselves, that is.

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