Guidelines for the Research Proposal

Guidelines for the Proposal/Pro-forma (Leicester MBA Nov 2016)

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The purpose of this Template is to help you prepare your proposal (pro-forma) and communicate it to your supervisor. This document should be sent to my email ([email protected]) ahead of our first meeting in order to allow me the time to provide my comments and return it to you for the meeting. Ideally, you will upload it a week ahead of our meeting in order to be able to commend on it, return it back to you in order to consider the comments and adjust the specifics of the meetings agenda. Practically, we have only a 1-hour face-to-face meeting via video conference (e.g. Skype, Collaborate) or telephone. That means that it is extremely important to complete your proposal and upload it ahead of our meeting. Given that you have to submit by the 26th December 2016, you have to start working immediately on it and make contact with me in order to arrange our meeting. I would say that you need at least a week in order to address the comments provided. This proposal should be submitted (attached) by 8th January 2017 with the Ethics Review using the on-line system (https://ethicsapp.le.ac.uk/ethics/review.aspx).

Page Setup

A Proposal template is provided below and students are required to use that template.

The coursework should be typed and be formatted for A4 (portrait). A left-hand margin of 1.25cm to 1.5cm should be used. Line spacing of 2 should be used for typescript, except for indented quotations where single spacing may be used. A font size of 12 is required, and you can use a clear font design such as Arial or Times New Roman.

Pages must be numbered consecutively throughout the text, with numbers located centrally at the bottom of each page.

Any abbreviations used should be those in normal use. Where necessary a key to abbreviations should be provided.

Type your full name, student registration number, programme title, module title, proposed thesis title and word count at the next page.

You must provide your word count immediately below the assignment, as well. The word count includes everything except the references and appendices. PLEASE, DO NOT REMOVE ANY PAGES OR GUIDELINES FROM THIS PROPOSAL.

Student to Complete
Student Name: Click here to enter text
Registration Number: Click here to enter text.
Module Title: MN7599: Research Methods and Dissertation
Proposed Dissertation Title: An assessment of the effectiveness of common restructuring strategies in resolving financial distress and achieving a successful turnaround of insolvent companies: An empirical investigation Resubmission: No
Word Count: 2844

The Proposal/Pro-forma Template

Title

Note on Content: (max. 25 words less than 15 words recommended)

A title should summarise the main idea of the proposal simply and, if possible, with style. You may want to use a title and a subtitle, separated by a colon (e.g. Brown Eggs: What they are Made of and How to Eat Them)

An assessment of the effectiveness of common restructuring strategies in resolving financial distress and achieving a successful turnaround of insolvent companies: An empirical investigation

Project aims and research questions

Note on Content: (max. 200 words)

A statement of your research questions (research questions should be listed).

Explain why this question is interesting and relevant (avoid general overambitious statements about the contribution of your research or the lack of literature). This should be documented through the impact of the phenomenon under investigation on the local communities/economies. Or the size of the relevant industries on the local/international economies. All figures should be properly cited.

In my role as an insolvency practitioner, I am often charged with the responsibility for implementing actions aimed at rescuing distressed insolvent companies and return them to profitability using various financial restructuring strategies. My research will be seeking to understand the effectiveness of the different techniques and principles that applied in financial restructuring based on an analysis of the outcomes of the cases where these strategies have been employed, successfully or unsuccessfully.

Research questions:

1. To what extent are common internal financing strategies namely; working capital reduction and dividend cuts effective in resolving financial distress and achieving a successful turnaround?

2. To what extent are common external financing strategies namely; Debt restructuring/refinancing and equity injection effective in resolving financial distress and achieving a successful turnaround?

3. How effective are restructuring strategies that combine both the internal and external financing strategies as compared to the ones that rely on one strategy solely?

4. What are the reasons for the success (or lack thereof) of each of the strategies discussed above?

The above questions are motivated by the need to have a good understanding of what restructuring strategies are the most effective for achieving a turnaround/rescue of the business as measured by its post-insolvency financial performance. Sudarsanam and Lai (2001),p. 190 argue that insolvency is the ultimate non-recovery and thus merits analysis as to [the] recovery strategies employed.

Theoretical Framework

The theoretical premise of this research proposal is that the influence of the restructuring strategies above on the turnaround prospects for a distressed (insolvent) company is uncertain, based on an analysis of prior studies in this area as discussed by Eichner T (2010), p106 - 127. These previous studies on the topic have yielded mixed results. For instance, about internal financing strategies, while the conceptual foundation might support a positive influence on working capital reduction on the turnaround from distress, empirical studies have not always replicated such a positive relation. The positive influence was found by Slatter (1984) for UK firms, by Hambrick, Schecter (1983) for US businesses, and by Bergauer (2001) for a small sample of German firms. Other studies found insignificant and hence inconclusive results, such as Chowdhury, Lang (1996), and Buschmann (2006) for US and German sample firms, respectively. On dividend cuts, Lie (2005) and Buschmann (2006) do not confirm a significantly positive effect. Sudarsanam/Lai (2001) in their study on UK firms, even found that dividend reductions are negatively related to the turnaround at a weak significance level. On external financing, Buschmann (2006) finds a significant positive correlation between the issue of new equity and turnaround for his sample of distressed German firms, whereas Eichner (2010) and Sudarsanam and Lai (2001) find only insignificant relations.

Given this uncertainty regarding the influence of the various strategies, this study will involve testing the hypothesis to find out whether each of the strategies under examination separately is positively or negatively related to the probability of turnaround from distress.

One of the most influential empirical studies in this area was done by Sudarsanam and Lai (2001) which comprises a sample of 166 UK-based firms that fell into distress with the purpose of assessing the effectiveness of restructuring strategies in bringing about the turnaround from distress. Regarding analysis, they relied on both linear and logistic regression analysis. They found support for the effectiveness of restructuring strategies based on their multivariate models. However, the explanatory power of the strategies was found to be modest. This study is deemed the most relevant and comparable for this particular research. Their research objective is consistent with the research questions chosen for this study as regards the effectiveness of restructuring strategies in bringing about the turnaround from distress.

Another comprehensive study was carried out by Asquith (1994), based on an empirical analysis of 102 US firms that issued bonds below investment grade (i.e. junk bonds) and subsequently fell into financial distress in the US. The study revealed weak firm-specific operating performance as the most dominant issue as regards turnaround. Further, they report evidence of the important nature of context factors such as capital structure or debt composition on the choice of restructuring strategies. Unfortunately, the effects of restructuring on the probability of turnaround or performance are not the primary focus of consideration; rather its the question of how firms restructure hence this study is not considered very influential to my study here.

Proposed methods

Regarding data gathering, I plan to use secondary data sets. While I have a keen interest in how restructuring actions can be applied successfully in Kenya and the East Africa region where I practice from. I appreciate that I will not have sufficient data for my analysis because legal framework that is supportive of business restructuring /rescue has not been in place for a long period hence there is little readily available data on financial restructuring activity in insolvency. I will, therefore, draw my data from jurisdictions that have used similar corporate rescue regimes for some time such as the United States and the United Kingdom. Consequently, I intend to retrieve my data about financial restructuring actions and outcomes from Insolvency databases and company filings relating to Chapter 11 restructuring (US) and Administration data (UK) cases.

I will limit my research to 100 restructuring cases that have been reported over the past 20 years as explained further below. The reliance on secondary data also limits typical biases in survey studies, such as non-response bias (Armstrong and Overton, 1983). Since the population of companies that went through successful financial restructuring in the period is likely to be very broad, I will undertake statistical sampling on the population of reported cases (529 cases) in both jurisdictions to arrive at a manageable number for analysis. Like other studies examined, the population of restructuring cases is expected to be over 500 entities. For example, the study by Marcel Bruno (2012) on the use of restructuring strategies in the US started with a population of 529 cases. Since the study by Eichner (2010) started with regarding the minimum sample size for logistic regression, Backhaus et al. (2006) state that at least 25 observations per category of the dependent variable being tested are required. Long (1997) on the other hand concludes that a sample size below 100 observations could be problematic. I will, therefore, work with a sample of 100 companies.

For analysis, I intend to use the maximum likelihood estimation of a logistic regression model as this is considered the dominant regression analysis for the analysis of post-insolvency performance using accounting data (Backhaus et al., 2006, p. 426) compared to other models such as multivariate discriminant analysis. For example, Denis and Rodgers (2007) and Hotchkiss (1995) are among those studies that use logistic regression models for their post-insolvency performance analysis. It is said to result in better comparability to existing literature, and it is also considered more robust than other methods such as multivariate discriminant analysis. In the regression model, positive (logit-) coefficients increase the probability of an outcome of Y=1 given X, i.e. an observed firms probability to recover from distress. The contrary is true for negative coefficients, i.e. a reduced probability for a turnaround.

The independent variables to be used are working capital reductions, dividend cuts, debt restructuring/refinancing and issue of new equity. The parameters that I will collect to measure the independent variables are summarized in the attached appendix on the variables. These are guided by the variables used in prior restructur...