Managerial Preferences in Financial Distress: The Role of Cognitive Load and Social Value Orientation in Restructuring Decisions

International audience; We study the preferences of managers when faced with two types of restructuring choices in financially distressed firms, the first belonging to the family of organizational restructuring and the second to the family of financial restructuring: the choice between massive layoffs or debt increase to reorganize the company. Both the complexity of the situation and individual personality traits can affect a manager’s preferences. We investigate the effect of complexity by experimentally manipulating cognitive load and measure social value orientation, a personality trait of managers. We find that, on average, cognitively loaded managers prefer laying off large numbers of employees rather than increasing the debt level, while managers with high social value orientation avoid massive layoffs. Further analysis suggests managers under cognitive load are not likely to follow deontological rules in their decisions. We explain this by the fact that the cognitively loaded managers choose massive layoffs as an easy way out of conflict with influential residual claimants. Consistent with the literature on social preferences, social value oriented manager are less likely to follow utilitarian rules. These results imply that the performance mechanisms emphasized to improve agency relations, for example in LBOs, have their own limitations during periods of financial distress. This study shows that one of these limits is related to cognitive distortions and interpersonal traits.