Learning by Failing, or Failing to Learn?

Abstract

This thesis investigates the effects on company performance of employing a CEO with bankruptcy experience. Bankruptcy experience refers to that the incumbent CEO has previously filed for bankruptcy as CEO in another company. We have limited the treatment group to yield the first subsequent CEO positions after the former bankruptcy. Thus, our treatment group consists of 486 Norwegian private Limited Companies. The observation period is from 1998 to 2014. The treatment group is throughout the thesis compared to a control group with the same distribution by sector, year, pre-treatment revenues and profitability. By applying a four-step empirical strategy we analyze differences between the treatment- and control group with regards to credit rating, changes in profitability, drivers of company performance, and bankruptcy probability. We find that CEOs with bankruptcy experience are employed in companies with significantly lower credit rating than what applies for the control group. Further, the profitability increases after hiring CEOs with bankruptcy experience, though from a lower level than in the control group. The ROA is on average negative in the treatment group for all three years following the CEO start. However, bankruptcy experience has no proven effect on the poor profitability. We have developed a bankruptcy prediction model, which yields significantly higher bankruptcy probability when adjusting for a CEO with bankruptcy experience. This suggests that employing a CEO with bankruptcy experience will increase the risk of filing for bankruptcy. By applying this improvement, investors and corporate banks will be able to better predict the bankruptcy risk for companies. The reason for the inferior performance and increased bankruptcy risk seems to lie in the selection of companies hiring such CEOs, rather than lack of skills in the treatment group. This thesis supports existing literature with regards to effects from CEO turnover, CEO impact on corporate performance and potential effects from bankruptcy. Our findings contribute to the understanding of the interaction between Norwegian private companies, bankruptcy prediction and the CEO’s previous bankruptcy experience.