How does Soft Information on the causes of default affect debt renegotiation? An empirical study of in-court debt restructuring of Italian SMEs

Ludovico Maria Cocco^{a, b}, Elisa Cavezzali^a, Ugo Rigoni^a, Giorgia Simion^c

Lending literature identifies Hard Information (HI) and Soft Information (SI) as the two types of information through which creditors reduce information asymmetry with debtors. This work studies how creditors of insolvent firms facing the bankruptcy process rely on SI on the causes of firm’s default complementary to HI, that is accounting and financial figures. Our focus is on how the interaction between SI and HI influences decisions on the debt restructuring plan, thus determining firm’s exit route from the in-court procedure (reorganization, acquisition or liquidation). We examine a dataset of Italian Small and Medium Enterprises that faced in-court debt renegotiation between 2011 and 2016, extracting the causes of default that affected them through the manual analysis of the proceedings’ documents. We demonstrate that the interaction between SI on the causes of firm’s default and HI has a significant role in guiding creditors’ vote over the debt restructuring plan, thus affecting chances for business’ going concern through bankruptcy. Results from multinomial logistic regression demonstrate that the role of acknowledged HI factors in guiding the debt renegotiation process can differ depending on the causes of default they combine to. Moreover, the causes of default and HI factors jointly concur in shaping the conditions for an acquisition, a reorganization or a liquidation as result of creditors’ decisions. We contribute to bankruptcy literature showing to what extent addressing SI on the causes of firm’s default increases our knowledge on how creditors decide in bankruptcy and on the expected firm’s exit path from the in-court procedure.

Keywords: Bankruptcy, Debt renegotiation, Causes of default, Soft information, SME.

JEL Classification: G33, M21

Presented at:

European Association of University Teachers in Banking and Finance, Ca’ Foscari University Venice. August 2019, Venice, Italy.

MFS Annual meeting, Jerusalem School of Business Administration, The Hebrew University. July 2019, Jerusalem, Israel.

EFMA Annual meeting, University of Azores. June 2019, Ponta Delgada, Island of S. Miguel, Portugal.