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http://ssrn.com/abstract=927081
 
 

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Paying CEOs in Bankruptcy: Executive Compensation when Agency Costs are Low


M. Todd Henderson


University of Chicago - Law School

August 2006

Northwestern University Law Review, Vol. 101, No. 4, 2007
U Chicago Law & Economics, Olin Working Paper No. 306

Abstract:     
Conventional wisdom suggests that high agency costs explain the (excessive) amounts and (inefficient) forms of CEO compensation. This paper offers a simple empirical test of this claim and the reform proposals that follow from it, by looking at pay practices in firms under financial distress, where agency costs are dramatically reduced. When a firm files for Chapter 11 or privately works out its debt with lenders, sophisticated investors consolidate ownership interests into a few large positions replacing diffuse and disinterested shareholders. These investors, be they banks or vulture investors, effectively control the debtor during the reorganization process. In addition, all the other players in compensation decisions - boards, courts, and other stakeholders - play a much more active role than for healthy firms. In other words, agency costs are much lower in Chapter 11 firms. Accordingly, if pay practices look the same in bankruptcy as they do in healthy firms, we can conclude that either (1) the current practices are efficient, or (2) that proposals to change executive compensation by reducing agency costs are incomplete. The data support one of these hypotheses: amounts and forms of compensation remain largely unchanged as agency costs are reduced, and look similar to those of healthy firms.

Number of Pages in PDF File: 63

Keywords: Executive compensation, bankruptcy, corporations

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Date posted: August 29, 2006 ; Last revised: October 24, 2007

Suggested Citation

Henderson, M. Todd, Paying CEOs in Bankruptcy: Executive Compensation when Agency Costs are Low (August 2006). Northwestern University Law Review, Vol. 101, No. 4, 2007; U Chicago Law & Economics, Olin Working Paper No. 306. Available at SSRN: http://ssrn.com/abstract=927081 or http://dx.doi.org/10.2139/ssrn.927081

Contact Information

M. Todd Henderson (Contact Author)
University of Chicago - Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
773-834-4168 (Phone)
773-702-0730 (Fax)
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