How Costly is Corporate Bankruptcy for the CEO?
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executive labor market
bankruptcy costs
forced turnover
CEO compensation
Finance and Financial Management
Labor Relations
Strategic Management Policy
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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.
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Author Karin S.Thorburn is a full time faculty member of Norwegian School of Economics. She is a visiting professor in the Finance Department of the Wharton School at the University of Pennsylvania.