Finance Papers

Document Type

Journal Article

Date of this Version

7-2003

Publication Source

Journal of Financial Economics

Volume

69

Issue

1

Start Page

227

Last Page

258

DOI

10.1016/S0304-405X(03)00126-0

Abstract

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.

Copyright/Permission Statement

© 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/

Comments

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.

Keywords

bankruptcy, auctions, liquidation, restructuring, risk shifting, asset substitution, managerial conservatism, executive compensation, CEO turnover, post-bankruptcy performance

Embargo Date

5-4-2006

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Date Posted: 27 November 2017

This document has been peer reviewed.