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The critical phase in a business failure-turnaround sequence: A study of the role of commercial banks as an influential trigger in the US and Canada
Abstract
This is an exploratory study into the role commercial banks play in triggering recognition of failure in a declining firm and the nature of the bank's responses. Management literature has excluded important issues in the critical phase intervening decline and turnaround such as how the recognition of failure takes place, and the possible external influences on the turnaround strategy. Commercial banks being an influential external agency are ideally placed to perform this role. The study covered four banks in Canada and six banks in the US. The data collection comprised of qualitative sources (27 in-depth interviews with bank officers) and quantitative sources (questionnaire to loan officers seeking information pertaining to specific problem loan firms). Information on 34 cases in the US and 146 in Canada was obtained. The quantitative data was studied using correlational analysis, factor analysis, and a multiple regression model to help explain the bank's response strategies. The study shows that acting out of self-interest, the banks are a source of triggering early recognition of failure in the firms and attempt to distinguish between decline in performance and impending failure. The variables explaining the response strategy of the bank include: the causes (internal/external) for decline, extent of security coverage, severity of the decline, the extent of cooperation with the bank, size, and the bank's judgement on the ability of the firm to turnaround. The bank's response should be considered at two levels: the initial efforts of the loan officer and the subsequent institutional response of the bank. While there were only a few major differences between US and Canadian banks on several aspects of recognition and response, they exhibited different correlation structures. While both US and Canadian officers preferred a workout to an exit strategy, the US officers had a bias towards a financial approach including additional financial coverage, and the Canadian officers showed a managerial approach including managerial changes. From the perspective of strategic management, this study shows the importance of a source outside the firm in triggering recognition of failure and its influence on the turnaround strategy of the firm.
Subject Area
Management|Banking|Business administration
Recommended Citation
Gopinath, C, "The critical phase in a business failure-turnaround sequence: A study of the role of commercial banks as an influential trigger in the US and Canada" (1990). Doctoral Dissertations Available from Proquest. AAI9101635.
https://scholarworks.umass.edu/dissertations/AAI9101635