CEO turnover and bankrupt firms’ emergence

Abstract

This paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor‐in‐possession financing. Additionally, there is a significant increase in managerial quality post‐turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free‐fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.

Corporate governance and financial distress: lessons learned from an unconventional approach

“…As predictive variables, we use the turnover of the members of the board of directors and the number of CEOs in the years prior to the crisis as corporate governance indicators, as in Elloumi & Gueyiè (2001), Fahlenbrach et al (2007, Lin et al, (2020), andFernando et al, (2020), along with the presence of the statutory and external auditors, as in Bredart (2014) and Cenciarelli et al, (2018). The final results confirm that financial variables (Z-Score) have a primary role in predicting corporate distress situations.…”

“…Furthermore, several papers have revealed the impact of corporate governance indicators (such as composition and the mandated duration of the main governance -and control -bodies, changes in majority shareholders; etc.) on default probability (Elloumi & Gueyi, 2001;Switzer et al, 2018;Lin et al, 2020;Fernando et al, 2020) and on the turnaround outcome (Miglani et al, 2020). However, previous studies have not yet thoroughly investigated the impact of governance variables in predicting the default of a company using new machine learning models, like Random Forest.…”

Who shall succeed? An examination of manager overconfidence and CEO selection

“…Lin et al. (2020) find that CEO turnover in bankrupt firms is positively related to the likelihood of reemerging from bankruptcy. There is also a significant increase in management quality following CEO turnover.…”

It's a matter of time! CEO turnover and corporate turnarounds in Italy

“…Despite this fact, predicting corporate survival through bankruptcy is an important area of investigation in corporate finance which has been analysed by several studies over the last decades (e.g. Lian, 2017;Lin et al, 2020).…”

“…Country-specific corporate governance practices can affect the relationship between CEO turnover and firm performance. Scholars, until now, analysed this relationship mainly in the US (Manzaneque et al, 2016), where creditors have a considerable influence over the governance of bankrupt firms (Lin et al, 2020). However, the US and the UK economic systems share several distinctions from the European one: i) shareholder rights are stronger in the US and in the UK, thanks to the common law, than under the civil law in Europe; ii) the majority of firms in Europe are familiar with a unique dominant shareholder while in the US and the UK the public company is more common; iii) in Europe, the dominant shareholder can severely damage corporate governance control systems (Owen et al, 2006).…”