Date of this Version
Journal of Financial Economics
Swedish bankruptcy filing automatically terminates the employment of the chief executive officer (CEO) 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 shareholder risk-shifting incentives. By investing conservatively, the CEO increases the joint probability that the auction results in a going-concern sale and that the CEO 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 auction bankruptcy appear healthy as they typically go on to perform at par with industry rivals.
© 2003. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
bankruptcy, auctions, liquidation, restructuring, risk shifting, asset substitution, managerial conservatism, executive compensation, CEO turnover, post-bankruptcy performance
Eckbo, B. E., & Thorburn, K. S. (2003). Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions. Journal of Financial Economics, 69 (1), 227-258. http://dx.doi.org/10.1016/S0304-405X(03)00126-0
Date Posted: 27 November 2017
This document has been peer reviewed.