Make it or Break it: Corporate Bankruptcy and Management Careers

70 Pages Posted: 20 Dec 2021 Last revised: 9 May 2024

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: May 9, 2024

Abstract

The extent to which a corporate bankruptcy can shift the career trajectory of managers has important implications for high-skilled labor markets but has proven difficult to measure. By combining an instrumental variable approach with the random assignment of judges who differ in their propensity to liquidate firms, this paper offers novel evidence for small and medium-sized business CEOs’ careers. We show that these CEOs, when displaced in bankruptcy, are 30 pp less likely to remain in the executive labor market, experience a temporary fall in labor earnings, and a persistent, near elimination of capital income. However, displaced CEOs are quickly re-employed and move to better-paying firms, although often in lower-ranked positions. Taken together, our evidence shows that CEOs can make or break their executive careers due to bankruptcy events that are beyond their control. We explore heterogeneity in effects and find that bankruptcy is most detrimental for longer-tenured CEOs and when a case is petitioned during times at which bankruptcy rates are low. Our findings are consistent with models of firm-specific human capital and statistical discrimination, where the labor market uses bankruptcy as a (negative) signal of managerial ability.

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

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

Suggested Citation

Grindaker, Morten and Kostøl, Andreas and Roszbach, Kasper F., Make it or Break it: Corporate Bankruptcy and Management Careers (May 9, 2024). 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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