What determines the personal costs of bankruptcy for CEOs? : an empirical study on the personal costs of bankruptcy for CEOs in Norway

Abstract

This thesis is a study of personal costs of bankruptcy for CEOs in Norway. If these costs are substantial, they can incentivize CEOs to hedge against bankruptcy. The practical implications can be severe for the firms’ different stakeholders. We study a sample of 1,446 CEOs in 1,023 Norwegian firms declared bankrupt between 2009 and 2013. The thesis comprises four main analyses examining personal costs in various forms: First, CEO replacement incurs a personal cost in terms of reputational damage. As such, we analyze determinants of CEOs´ replacements prior to bankruptcy. Second, those not attaining a new CEO position after bankruptcy suffer costs in terms of lower status. Therefore, we address the employment changes for our sample CEOs. Third, we address the compensation loss imposed on the CEOs prior to bankruptcy. Fourth, we investigate compensation loss for CEOs that occurs after the bankruptcy. These analyses are intended to give a profound understanding of how CEOs in Norway are affected by bankruptcy. We argue that the sum of CEOs´ personal costs of bankruptcy in Norway are sparse. Consequently, we find no evidence to support the existence of CEO hedging behavior in Norway. Compared with previous research, we find a relatively small share of CEOs being replaced prior to bankruptcy (14% annually). Further, we observe a marginal reduction of NOK 50 thousand in compensation prior to bankruptcy. In addition, we find a compensation loss after bankruptcy for those not finding new employment as CEOs, but it only amounts to NOK 536 thousand over their lifetime. However, we find that only a relatively small fraction of our sample attains a new CEO position after bankruptcy (20%). This thesis complements other research in Sweden and the U.S. on the same issue. Notably, it is the first examination of Norwegian bankruptcies (and legislation). Under Norwegian legislation, all bankrupt companies cease to exist. In both Sweden and the U.S. however, firms can continue as a going-concern and sustain their business. Moreover, most larger restructurings in Norway are settled in out-of-court negotiations and not registered, resulting in a sample mostly consisting of small firms. These distinctions can also explain differences in results between our study and previous research.