Executive Labor Market Frictions, Corporate Bankruptcy and CEO Careers

49 Pages Posted: 20 Dec 2021

See all articles by Morten Grindaker

Morten Grindaker

BI Norwegian Business School

Andreas Kostøl

Arizona State University (ASU) - W.P. Carey School of Business; Statistics Norway; Norges Bank; IZA Institute of Labor Economics

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business

Date Written: December 16, 2021

Abstract

CEOs of large firms filing for bankruptcy are more likely to exit the executive labor market after bankruptcy and experience substantial compensation losses (Eckbo et al., 2016). While the fear of reputational scarring can lead to lower risk-taking and manifest itself as lower rates of entrepreneurship and job growth, the mechanisms through which bankruptcy affects CEO careers are not well understood. In this paper, we examine the effect of "random bankruptcy" decisions on small and medium-sized business CEOs’ careers. By random, we mean job separation for reasons unrelated to a firm or CEO quality but rather through a court’s bankruptcy decision. We control for the unobserved ability of bankrupt and non-bankrupt CEOs by using randomly assigned judges’ propensity to liquidate firms as an instrument. We then combine our sample of CEOs with administrative records containing granular information on income, wealth, new employers and job titles. Our results show that bankrupt CEOs find new employment quickly, but that a large share exits the executive labor force. On average, bankruptcy reduces CEOs’ variable income components. While the net present value of CEOs’ loss of future capital income equals more than 60 percent of annual pre-bankruptcy income, we observe no effect on wage income. We find that displaced CEOs are more likely to reallocate to new industries and new geographic areas, suggesting that managerial skills are portable. We explore how the income and employment effects of bankruptcy vary with industry conditions. Consistent with the executive labor market using bankruptcy as a noisy signal of managerial ability, we find the displacement effect is stronger when industry conditions are good. Our evidence is consistent with the presence of information frictions that could entail important social costs.

Keywords: Occupational Choice; Bankruptcy; CEO; Organizations; Executive Compensation.

JEL Classification: G33, J24; K22, L29, M12

Suggested Citation

Grindaker, Morten and Kostøl, Andreas and Roszbach, Kasper F., Executive Labor Market Frictions, Corporate Bankruptcy and CEO Careers (December 16, 2021). Available at SSRN: https://ssrn.com/abstract=3987495 or http://dx.doi.org/10.2139/ssrn.3987495

Morten Grindaker

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Andreas Kostøl

Arizona State University (ASU) - W.P. Carey School of Business ( email )

Tempe, AZ 85287-3706
United States

Statistics Norway ( email )

N-0033 Oslo
Norway

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Kasper F. Roszbach (Contact Author)

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

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