How Costly Is Corporate Bankruptcy for the CEO?
B. Espen Eckbo
Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)
Karin S. Thorburn
Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Queen's School of Business; University of Pennsylvania - The Wharton School
February 12, 2016
Journal of Financial Economics (JFE), Forthcoming
We examine chief executive officer (CEO) career and compensation changes for large firms filing for Chapter 11. One-third of the incumbent CEOs maintain executive employment, and these CEOs experience a median compensation change of zero. However, incumbent CEOs leaving the executive labor market suffer a compensation loss with a median present value until age 65 of $7 million (five times pre-departure compensation). The likelihood of leaving decreases with profitability and CEO share ownership. Furthermore, creditor control rights during bankruptcy (through debtor-in-possession financing and large trade credits) are associated with CEO career change. Despite large equity losses (median $11 million for incumbents who stay until filing), the median incumbent does not reduce his stock ownership as the firm approaches bankruptcy.
Number of Pages in PDF File: 47
Keywords: labor market capital, personal bankruptcy costs, turnover, career change, CEO compensation, wealth loss
JEL Classification: G33, G34, M12
Date posted: August 31, 2012 ; Last revised: February 12, 2016