Discussion Paper Details

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Title: Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions

Author(s): B Espen Eckbo and Karin S Thorburn

Publication Date: July 2002

Keyword(s): bankruptcy, CEO turnover, executive compensation, post-bankruptcy performance, private benefits of control and risk-shifting incentives

Programme Area(s): Financial Economics

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 Reference

Eckbo, B and Thorburn, K. 2002. 'Control Benefits and CEO Discipline in Automatic Bankruptcy Auctions'. London, Centre for Economic Policy Research.