Empirical Legal Research Network: 'Why are directors afraid of help? An empirical investigation into the stigma of business failure'

Empirical Legal Research Network | Work-in-Progress Seminars

 Dr Emilie Ghio, Lecturer in Corporate and Insolvency Law, Edinburgh Law School

About the event

Does insolvency attract stigma? And if so, to what degree? Answering these questions is central to understanding company, or director, responses to corporate insolvency, particularly in the early stages of distress, where ailing becomes failing. A large body of literature argues that there exists a strong sense of stigma surrounding insolvency which contributes to the low uptake of rescue procedures. The prevailing explanation is that “the stigma surrounding going out of business […] prevents many from looking for help at the time it would provide the greatest chance of turning a business around.”[1]

However, stigma is notoriously difficult to qualify or quantify. As a result, the literature so far has mostly relied on the assumption that “bankruptcy stigma is ubiquitous” and therefore, “[its] determinative role […] should not be questioned”. So, how important is the stigma around insolvency? 

To answer this question, I have combined two qualitative studies based on different methodologies. The first study is an extensive review of the literature in selected jurisdictions; the second is an empirical collection of data obtained through interviews with corporate directors. 

The findings can be briefly summarised as follows: 

1. I identify a prominent literary narrative around the stigma associated with insolvency. In the majority of jurisdictions surveyed, this narrative is apparent across policy debate, legislative discussion and academic literature.  
2. However, I find that in the corporate reality, amongst company directors, the sense of stigma around insolvency is not as strong as the literary narrative may suggest. Rather, the empirical study reveals that, amongst directors of micro, small, and medium enterprises (MSMEs), the perception of stigma associated with insolvency is no more than moderate. Most importantly, I identify an acute lack of knowledge of insolvency amongst corporate managers.

[1] Institute of Chartered Accountants of England and Wales, “It’s time to admit British business has a problem” (7 September 2017), p. 1.

For joining details, please e-mail gabrielle.watson@ed.ac.uk