Working Paper: CEPR ID: DP3481
Authors: Espen Eckbo; Karin S. Thorburn
Abstract: We argue that the existence of CEO private control benefits complements managerial reputation in counteracting costly shareholder risk-shifting incentives during severe financial distress, when job-loss may be imminent. We examine this argument empirically using bankruptcy filings in Sweden, where a filing automatically terminates CEO employment and requires the firm to be sold in an open auction. The median CEO income loss is a dramatic 40%, suggesting that bankruptcy filing damages CEO reputation. Empirical proxies for both CEO reputation and control benefits are significant determinants of the probability of the CEO being rehired by the buyer in the auction, as predicted. Moreover, we find that the rehired CEOs generate a post-bankruptcy accounting performance at par with industry rivals. The surprisingly strong survival characteristics of the reorganized firms are consistent with managerial conservatism ex ante, and help alleviate creditor concern with costly asset substitution designed to delay filing in an automatic bankruptcy auction system.
Keywords: bankruptcy; ceo turnover; executive compensation; post bankruptcy performance; private benefits of control; risk-shifting incentives
JEL Codes: D44; G33; G34; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bankruptcy (K35) | CEO reputation (M12) |
| CEO reputation (M12) | rehiring probability (J63) |
| managerial conservatism (G31) | post-bankruptcy accounting performance (G33) |
| CEO control benefits (M12) | managerial conservatism (G31) |
| CEO control benefits (M12) | rehiring probability (J63) |
| CEO reputation (M12) | rehiring probability (J63) |