DP10985 How costly is corporate bankruptcy for the CEO?

Author(s): B Espen Eckbo, Karin S Thorburn, Wei Wang
Publication Date: December 2015
Keyword(s): career change, CEO compensation, labor market capital, personal bankruptcy costs, turnover, wealth loss
JEL(s): G33, G34, M12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10985

We examine CEO career and compensation changes for 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) appear to effect 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.