Resolution of financial distress in SMEs: How do family ownership and involvement affect second chance?

Abstract

The aim of this study is to understand if the idiosyncrasies of family firms affect the likelihood of successfully recovering from financial distress through a debt restructuring proceeding. Relying on the mixed-gamble logic of the behavioral agency model, we hypothesize that family small and medium-sized enterprises (SMEs) have greater chances of resolving financial distress than non-family SMEs, as the former are driven by the preservation of long-term socioemotional wealth. Our findings suggest that family ownership and control, as well as family involvement, are positively associated with the likelihood of successful debt restructuring. This study highlights that the unique emotional attachment family executives have to their business enhances their motivation and capabilities, making them more effective than their non-family counterparts at resolving financial distress through debt restructuring. • The idiosyncrasies of family firms affect the likelihood of successfully recovering from financial distress. • Family firms are primarily driven by the preservation of long-term socioemotional wealth when addressing financial distress. • Family firms in complex situations can exploit their close social ties and local connections. • The choices and attitudes of financially distressed family firms can be interpreted through the lens of the mixed-gamble perspective. • Family later generation involvement and family board leadership positively affect the likelihood of succeeding in debt restructuring proceedings.