Management trustworthiness in distressed companies: relevance for the approval of restructuring plans by Brazilian private Banks

This research hypothesizes that, for companies in financial distress, management trustworthiness is relevant in creditors' decisions – specifically private banks – regarding the approval or rejection of the borrowers' restructuring plan. Data extracted from the most extensive restructuring proceedings filed before the Court of the State of São Paulo show a moderate positive correlation between changes in the debtors' management and the approval of their plans. Questions made to the financial institutions indicate an even stronger correlation and that the management compensation package influences the approval of the borrowers' restructuring. These two objective references – changes in management and managers' compensation package – ground the conclusion that management trustworthiness is relevant for the private financial institutions' decisions on their debtors' debt renegotiation. However, there are some mismatches among the data obtained from the legal proceedings and the answers of the creditors, suggesting that the banks do not have a straightforward procedure to assess their borrowers' management trustworthiness and to insert it with a specific weight in their credit granting procedure.