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Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions

43 Pages Posted: 15 Jul 2002 Last revised: 27 Oct 2008

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)

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Abstract

Swedish bankruptcy filing automatically terminates CEO employment and triggers an auction of the firm. Critics of this system warn of excessive shareholder risk-shifting incentives prior to filing. We argue that private benefits of control induce managerial conservatism that may override risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that she is rehired. This uniquely implies that the rehiring probability is increasing in private control benefits, which our empirical results support. We also find that buyers in the auction screen on CEO quality. Overall, labor market discipline is dramatic, as filing CEOs suffer large income losses relative to CEOs of matched, non-bankrupt firms. Firms emerging from bankruptcy typically perform at par with industry rivals.

Keywords: CEO Turnover, Executive Compensation, Private Benefits of Control, Risk-shifting Incentives, Bankruptcy, Post-bankruptcy Performance

JEL Classification: D44, G33, G34, K22

Suggested Citation

Eckbo, B. Espen and Thorburn, Karin S., Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions. Journal of Financial Economics (JFE), Vol. 69, pp. 227-258, 2003; Tuck School of Business Working Paper No. 02-16. Available at SSRN: https://ssrn.com/abstract=318488 or http://dx.doi.org/10.2139/ssrn.318488

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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