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Control benefits and CEO discipline in automatic bankruptcy auctions

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  • Espen Eckbo, B.
  • Thorburn, Karin S.

Abstract

We argue that the existence of CEO private control benefits complements managerial reputation in counteracting costly shareholder risk-shifting incentives during severe financial distress, when job-loss may be imminent. We examine this argument empirically using bankruptcy filings in Sweden, where a filing automatically terminates CEO employment and requires the firm to be sold in an open auction. The median CEO income loss is a dramatic 40%, suggesting that bankruptcy filing damages CEO reputation. Empirical proxies for both CEO reputation and control benefits are significant determinants of the probability of the CEO being rehired by the buyer in the auction, as predicted. Moreover, we find that the rehired CEOs generate a post-bankruptcy accounting performance at par with industry rivals. The surprisingly strong survival characteristics of the reorganized firms are consistent with managerial conservatism ex ante, and help alleviate creditor concern with costly asset substitution designed to delay filing in an automatic bankruptcy auction system.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 69 (2003)
Issue (Month): 1 (July)
Pages: 227-258

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Handle: RePEc:eee:jfinec:v:69:y:2003:i:1:p:227-258

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Web page: http://www.elsevier.com/locate/inca/505576

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Citations

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Cited by:
  1. Alan Schwartz, . "A Normative Theory of Business Bankruptcy," American Law & Economics Association Annual Meetings 1037, American Law & Economics Association.
  2. Wennberg, Karl & Wiklund, Johan & DeTienne, Dawn R. & Cardon, Melissa S., 2010. "Reconceptualizing entrepreneurial exit: Divergent exit routes and their drivers," Journal of Business Venturing, Elsevier, vol. 25(4), pages 361-375, July.
  3. Acharya, Viral V. & Amihud, Yakov & Litov, Lubomir, 2011. "Creditor rights and corporate risk-taking," Journal of Financial Economics, Elsevier, vol. 102(1), pages 150-166, October.
  4. Espen Eckbo, B. & Thorburn, S. Karin, 2008. "Automatic bankruptcy auctions and fire-sales," Journal of Financial Economics, Elsevier, vol. 89(3), pages 404-422, September.
  5. Anantharaman, Divya & Lee, Yong Gyu, 2014. "Managerial risk taking incentives and corporate pension policy," Journal of Financial Economics, Elsevier, vol. 111(2), pages 328-351.
  6. Albuquerque, Rui & Schroth, Enrique, 2010. "Quantifying private benefits of control from a structural model of block trades," Journal of Financial Economics, Elsevier, vol. 96(1), pages 33-55, April.
  7. Gary Cook & Keith Pond, 2006. "Explaining the choice between alternative insolvency regimes for troubled companies in the UK and Sweden," European Journal of Law and Economics, Springer, vol. 22(1), pages 21-47, July.
  8. Eckbo, B. Espen & Thorburn, Karin S., 2009. "Creditor financing and overbidding in bankruptcy auctions: Theory and tests," Journal of Corporate Finance, Elsevier, vol. 15(1), pages 10-29, February.
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  11. Cerqueiro, G.M. & Ongena, S. & Roszbach, K., 2011. "Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment," Discussion Paper 2011-087, Tilburg University, Center for Economic Research.
  12. Fan, Joseph P.H. & Huang, Jun & Zhu, Ning, 2013. "Institutions, ownership structures, and distress resolution in China," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 71-87.
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