How Costly Is Corporate Bankruptcy for Top Executives?

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2013-01-30


Editor’s Note: The following post comes to us from B. Espen Eckbo, Professor of Finance at the Tuck School of Business at Dartmouth College; Karin Thorburn, Professor of Finance at the Norwegian School of Economics; and Wei Wang,

Assistant Professor of Finance at Queen’s School of Business.

To what extent are CEOs filing for bankruptcy tainted by the bankruptcy event? On the one hand, the CEO bears a major responsibility for the firm going broke. After all, the filing might have been avoided if the CEO had managed to reduce firm leverage or otherwise reorganize debt claims in time to stay out of court. On the other hand, CEOs going through bankruptcy likely gain valuable experience from the crisis. The net impact of these two opposing effects on executive reputation is an open empirical question.

In the paper, How Costly is Corporate Bankruptcy for Top Executives?, which was recently made publicly available on SSRN, we provide some first systematic estimates of top executives’ personal costs of corporate bankruptcy. The estimates are based on 324 large public companies filing for Chapter 11 bankruptcy over the past two decades.

The study provides evidence on the following three questions. First, do top executives experience large personal losses (both income and wealth) when filing for bankruptcy? Second, do creditor control rights influence the probability of CEO departure and the income losses? Third, do ex ante predicted personal losses affect CEO’s decision to leave the firm and their compensation contract design?

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R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation,

Date tagged:

01/30/2013, 15:36

Date published:

01/30/2013, 13:17