Effect of reorganization actions on the financial performance of small entrepreneurial distressed firms

Abstract

Purpose

The purpose of this paper is to analyze the effect of different reorganization actions on long‐term financial performance of reorganizing small entrepreneurial firms in Finland.

Design/methodology/approach

An structural equation model estimated by partial least squares is applied to survey data from 98 reorganizing very small firms to analyze the effect of organizational change (OC), financial reorganization, management control system change (MCSC), and management accounting change (MAC) on performance.

Findings

Evidence supports three of the seven research hypotheses. Debt restructuring has a positive effect on performance. Liquidation of assets and OC do not show a significant direct effect but OC has a positive total effect. MCSC has a positive effect whereas the effect of MAC is negative. Compatibility of reorganization actions with the confirmed reorganization plan affects positively performance.

Research limitations/implications

The sample is small. In further studies, larger samples should be used. Effect of reorganization on performance is self‐assessed by the firms. Further studies should apply more objective measures. The constructs of variables are intended for larger firms. New constructs should be developed for very small firms.

Practical implications

It is important that reorganization administrators and consultants prepare a careful reorganization plan to be followed during the program. In small reorganizing firms, it is beneficial to develop management control systems. However, one should be cautious when developing formal management accounting systems for very small firms.

Originality/value

This paper is the first one developing a structural model of the effects of reorganization actions on performance of small firms. It brings new evidence on the effects of organizational and control system change.

Citation

Laitinen, E.K. (2011), "Effect of reorganization actions on the financial performance of small entrepreneurial distressed firms", Journal of Accounting & Organizational Change, Vol. 7 No. 1, pp. 57-95. https://doi.org/10.1108/18325911111125540