How costly is corporate bankruptcy for top executives?∗

B. Espen Eckbo

Tuck School of Business at Dartmouth

Karin S. Thorburn

Norwegian School of Economics, CEPR and ECGI

Wei Wang

Queen’s School of Business

March 5, 2012

Abstract

We provide large-sample estimates of CEO personal bankruptcy costs that, for the first time, ac-count for the CEO’s post-bankruptcy employment income. We track CEO employment changesusing 342 U.S. public companies filing for Chapter 11 between 1996 and 2007. Surprisingly,more than half of the departed CEOs maintain full-time employment—in sharp contrasts withthe zero reemployment rate traditionally assumed in the literature. Two-thirds are hired by anew company, and many continue as top executives. Also surprising, the median present valueof future income loss is close to zero for executives that become CEO of another public firm,suggesting that these managers are not “tainted” by the bankruptcy event. CEOs who fail tofind new employment, however, experience a median income loss with a present value of $4.4million (discounted until retirement age). Across all CEOs in the sample, the ex ante expectedmedian personal bankruptcy cost is $2.7 million, which is less than three times the annualincome. In addition, the median CEO loses equity worth $2 million over the last year priorto filing. We also provide some first evidence on how creditor activism, in particular throughdebtor-in-possession (DIP) financing, affects forced CEO turnover.

∗We appreciate comments made by seminar participants at Queens University, University of Hong Kong andUniversity of New South Wales. We also thank our team of research assistants at Dartmouth College and at Queen’sUniversity: Xiaoya Ding, Sam Guo, Sammy Singh, Lauren Willoughby, Milton Fung, Matt Murphy, Hank Yang, andNihkil Wadhwa. We are also grateful for partial financial support for this project from Tuck’s Lindenauer Center forCorporate Governance, from SNF project #1331, and from Queen’s School of Business Research Program. Emails:b.espen.eckbo@dartmouth.edu; karin.thorburn@nhh.no; wwang@business.queensu.ca.

1 Introduction

High personal costs of financial distress give managers incentives to hedge against default by reduc-

ing leverage, choosing less risky investments, and managing their firms more efficiently. Designing

labor contracts which regulate these incentives is not only difficult in theory (Berk, Stanton, and

Zechner, 2010), it requires empirical evidence which is largely missing in the literature. A major

empirical obstacle has been to track the departed executive’s new employment, if any, which is

needed to estimate loss of managerial rents. Thus, despite a substantial literature on managerial

turnover, systematic empirical evidence on the personal cost of forced turnover is sparse.

Gilson (1989) and Gilson and Vetsuypens (1993), the studies on U.S. bankruptcies and financial

distress closest in spirit to ours, present evidence suggestive of significant managerial income loss

from bankruptcy. For example, top executives lose a median of $1.1 million (mean $1.3 million) in

present value of future income to retirement age. This is in 1980s dollars and roughly six times the

annual CEO cash compensation. Moreover, new CEOs hired from the outside receive significantly

greater compensation than the outgoing CEO, while the compensation is significantly lower if the

new CEO is promoted internally. These findings are interesting as they suggest that the departing

CEO earned rents before being “tainted” by financial distress and bankruptcy.

The contribution of our paper to this literature is twofold. First and foremost, we identify the

departing CEO’s subsequent employment, which in turn allows us to estimate the post-departure

employment income. We do this through extensive searches of Factiva news, social media, various

internet sources, as well as more traditional sources. Thus, we are able to relax the strong as-

sumption in the literature that the post-departure CEO income is zero until retirement. This turns

out to be important as we find that as much as two-thirds of the former CEOs receive some kind

of new position starting on average one year after departure. Of these CEOs, 61% get full-time

employment, over half of which become CEO of another company. This rate of success in regaining

full employment is surprising by any standard—especially given that our departing CEOs were

tainted by severe financial distress and even default. Thus, a precise estimate of the executives’

personal cost of bankruptcy requires one to offset the initial income loss of the departing CEO with

the present value of the new employment income stream, which is what we do.

Our second main contribution is to investigate the role of creditor control rights and asso-

1

ciated “creditor activism” in affecting CEO personal bankruptcy costs through CEO turnover.

Much has been written about the increased efficiency of Chapter 11 proceedings over the past two

decades—largely a reflection of the emergence of market-driven creditor control strategies during

the bankruptcy and restructuring process (Baird and Rasmussen, 2002; Ayotte and Morrison, 2009;

Jiang, Li, and Wang, 2011). Examples of such activism include loan to own (acquisition) strate-

gies, prepackaged filings (sometimes with a merger agreement in place), debtor-in-possession (DIP)

financing, and rapid sale of the firm inside Chapter 11.1

While this increased use of creditor control mechanisms undoubtedly has lowered corporate

bankruptcy costs, the focus here is whether it has also impacted CEO personal bankruptcy costs.

Since top executives exercise “residual” control rights (rights not actively exercised by securityhold-

ers) it is natural to expect creditors to take an active interest in which CEO to replace—and with

whom. This interest is driven not only by the objective of retaining or hiring high-quality CEOs,

but also to regulate CEO implementation of risk-shifting strategies on behalf of residual claimants

(Jensen and Meckling, 1976). Also, CEOs with different risk aversion and career concerns may

implement different investment policies, which in turn affect expected creditor recovery rates (Gib-

bons and Murphy, 1992; Hirshleifer and Thakor, 1992; Zwiebel, 1995; Eckbo and Thorburn, 2003).

Yet another concern may be to maintain good, ongoing supplier relationship developed by the firm’s

exisiting executives which may be difficult for an outsider to recreate.2 Finally, CEO investment

choices leading up to and during bankruptcy are also influenced by legal fiduciary responsibilities,

which expand to include creditors when a company becomes insolvent (Gilson, 1990; Gilson and

Vetsuypens, 1994; Branch, 2000; Ayotte and Morrison, 2009).

We measure creditor control rights using debt characteristics such as the filing firm’s pre-filing

debt structure (leverage ratio), filing form (prepack), and DIP financing by pre-petition lenders. Of

these, we expect DIP financing to be the most effective, as it allows the creditor to write financing

restrictions directly into the debt contact, a suspicion which is supported by our evidence.3 We also

1Creditor activism was not always accepted by the courts. To illustrate, in the bankruptcy of Sunbeam Osterin the early 1990s, Japonica Partners, led by Paul Kazarian, purchased debt claims to influence the bankruptcyoutcome—much as is commonplace today. However, the court reacted to this investment by refusing to let Kazarianvote his debt claims under the theory that he effectively was a ”shareholder in waiting”. See also Hotchkiss, John,Mooradian, and Thorburn (2008) for a review of evidence on creditor involvement in the bankruptcy process.

2An example of this is the 2007 bankruptcy filing by Hancock Fabrics Inc., where the company’s suppliers formedan unsecured creditor committee and made sure the prefiling CEO Jane Aggers stayed on both through bankruptcyand thereafter.

3To illustrate the power of DIP financing: In Recoton’s 2003 bankruptcy filing, senior creditors replaced the old

2

examine the effect of large institutional equity ownership in bankruptcy and large nondebt liabilities

(primarily trade credits). While the use of DIP financing has been thoroughly documented elsewhere

(Dahiya, John, Puri, and Ramirez, 2003), it was not yet available during the early sample period of

Gilson and Vetsuypens (1993), and so we are the first to investigate whether this and other creditor

control mechanisms impact forced CEO turnover, and thus indirectly compensation changes after

bankruptcy.

Our sample consists of 342 large public U.S. companies that filed for Chapter 11 between

1996 and 2007, and where the case was resolved before 2011. We track CEO turnover from three

years prior to filing until three years after the restructure firm emerges from Chapter 11 (or until

liquidation)—a total of 2,197 firm-year observations and 475 CEO turnover incidents in the period

1993-2010. This sample is the largest in the bankruptcy turnover and compensation literature and

large also by the standards of the broader turnover literature.4

We report turnover statistics which, as expected, are much higher than the turnover rate pro-

vided in studies of solvent firms.5 Of the original CEOs employed by the firm three years prior to

the filing year, 81% have departed by the end of year +2 (where year 0 is the year of bankruptcy

filing). In comparison, for a sample of 126 firms in financial distress, 1979-1984, Gilson (1989)

reports that 66% of incumbent CEOs remain in office two years following the year of out-of-court

restructuring or Chapter 11 filing.6 We also document that half of the departing CEOs were forced

to leave, at an average age of 52 (vs. 56 years for CEOs leaving voluntarily) and with a five-year

tenure as CEO. Interestingly, when a CEO is forced out, it is often by active creditors. Multino-

mial logit regressions further show that the likelihood of forced CEO turnover is lower when a large

fraction of the firm’s liabilities are nondebt liabilities, such as trade credits.

For each CEO, we record the severance pay (which has a median of $1.6 million),7 the type of

CEO and appointed Jerry Kalov from the outside, and then provided debtor-in-possession (DIP) financing with acovenant stating that removal of Kalov would be considered a default event on the DIP facility.

4To our knowledge, the only other large-sample study tracking CEO income changes around bankruptcy filings isEckbo and Thorburn (2003) who study 265 bankruptcy auctions in Sweden. We return to their evidence below.

5For recent studies of CEO turnover outside of bankruptcy, see e.g. Huson, Parrino, and Starks (2001), Huson,Malatesta, and Parrino (2004), Perez-Gonzales (2006), Evans, Nagarajan, and Schloetzer (2010), Kang and Mitnik(2010), and Jenter and Kanaan (2010).

6Gilson and Vetsuypens (1993), Betker (1995), Hotchkiss (1995), Khanna and Poulsen (1995), Evans, Nagarajan,and Schloetzer (2010), Ayotte and Morrison (2009) and Jiang, Li, and Wang (2011) all report evidence on turnoverrates around Chapter 11 filings.

7Fee and Hadlock (2004), Yermack (2006) and Goldman and Huang (2011) report similar severance payments forfirms outside of bankruptcy.

3

new employment, and estimate the compensation change (salary and total pay, including bonus and

stock-based grants). While we are able identify the CEO’s actual new employment category, the

new employment income must in most cases be estimated. The exception is when the CEO remains

with a firm that emerges as a public company, or assumes a position as CEO of another public

company, and the compensation information is available directly on ExecuComp. If, however, the

CEO moves to a CEO position in a private company, or the new firm is too small to be covered

by ExecuComp, we use the contemporaneous CEO pay recorded in ExecuComp for a public firm

matched on size and industry, and then reduce this total pay by the percentage discounts for CEOs

in private companies reported by Gao, Lemmon, and Li (2011).

For non-CEO Chairman or new non-executive positions at either public or private firms, we

again use size-matched firms from ExecuComp in combination with reported discounts for such

positions. Only if there is no new employment or if the CEO retains an honorary position with

the firm do we assume that the CEO income drops to zero. Thus, we are assigning a typical com-

pensation to most of the departing CEOs, conditional on the true job category and firm size. By

construction, this estimation technique rules out a “fire-sale” discount in the CEO’s new compen-

sation. This is unlikely to have much of an effect on our bankruptcy cost estimates for two reasons:

First, there is little evidence of a fire-sale discount in the CEO compensation change in those cases

where we do observe the new compensation directly. Second, a fire-sale discount in pay is bound

to be temporary as the CEO rebuilds some of her reputation over time. Thus, the typical pay level

may in fact be the best estimate for most years until retirement.8

For the overall sample, including 92 CEOs who remain as CEO of the restructured firms, the

median percent CEO total income change is -80%. Discounted at 10% until retirement plus any

severance pay received at departure yields a median estimate of the present value (PV) of income

loss of -$2.7 million (mean -$16.0 million) in constant 2009 dollars. The median PV income loss is

our sample-wide estimate of CEO personal bankruptcy costs. This loss is only two times the CEO’s

pre-turnover total compensation, and thus represents a much smaller loss than the one estimated

by Gilson (1989). The cost estimate does, however, not include loss of the value of CEO vested

8A measurement issue of a different type arises as the frequency distribution of CEO compensation change is highlyskewed. We therefore follow Gilson and Vetsuypens (1993) and focus primarily on the median value. Estimates basedon the mean tend to produce greater personal bankruptcy costs than estimates based on the median, whether wereport percentage changes or dollar changes in total compensation.

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shareholdings in the bankrupt firms, which fall from a median value of $12 million in year -3 to $2

million in year -1, and to zero in the year of bankruptcy filing.

Three groups of departing CEOs typically don’t seem to incur any losses: the CEOs who retain

their position or stay on as non-CEO Chairman of the restructured firm, and those who become

CEO of another public firm. It is in these subsamples where the extant estimates of personal

bankruptcy costs make the greatest error by leaving out the positive effect of future employment

income. It appears that the restructured firms quickly resume paying competitive compensation

as they emerge from bankruptcy. In contrast, CEOs who fail to find new employment and who

become consult or self-employed experience a median PV income loss of -$4.4 million.

We are particularly interested in the incumbent CEOs, i.e., CEOs in place at the very beginning

of the sample period. These are the CEOs who suffer potentially the most from being associated

with the bankruptcy event, and so may have the greatest difficulty in finding high-value new em-

ployment.9 We find that approximately 50% of incumbent CEOs find new full-time employment as

Chairman of the board, CEO, and non-CEO executive, or stay at the helm of the restructured firm.

When the compensation change is discounted to retirement age, and after adding any severance

pay, the estimated personal bankruptcy cost for this group as a whole has a median value of -$0.7

million. Thus, this group as a whole suffers relatively modest personal bankruptcy costs, if any.

Again, this abstracts from the loss of equity investment value, which is large but not a bona fide

bankruptcy cost as defined here. In contrast, the incumbent CEOs who do not find new full-time

employment suffer a median percentage decline in annual compensation of -100% (mean -89%).

The estimated median personal bankruptcy cost for this group is -$4.2 million.

Another interesting finding is that CEOs who leave voluntarily suffer lower personal bankruptcy

costs than CEOs who are forced out. Leaving voluntarily for another full-time employment oppor-

tunity leaves the CEO with a median PV income loss of zero, while those who find new full-time

employment after being forced out suffer a median loss of -$3.0 million. A consistent explanation

is that CEOs who earn rents prior to bankruptcy prefer to stay until they are forced out, and

then take a pay-cut as the wage is being reset to a more competitive level in the new full-time

employment opportunity.

9Other CEOs who are hired (and possibly fired) during the bankruptcy event period include restructuring spe-cialists which are not personally tainted by the bankruptcy event.

5

We estimate the CEO expected bankruptcy costs in terms of the predicted probability of being

rehired and the predicted PV income loss. These ex ante cost estimates are used as determinants

for forced and voluntary CEO turnover, and for the design of the CEO compensation contract

at the bankrupt firm. Interestingly, a high predicted rehiring probability, perhaps reflecting high

managerial quality, is associated with lower voluntary turnover and higher total compensation.

Moreover, high ex ante personal bankruptcy costs are associated with lower voluntary turnover and

higher total compensation, possibly suggesting that low quality managers stay with the distressed

firm in an attempt to extract rents.

The rest of the paper is organized as follows. Section 2 describes the sample selection pro-

cedure and describes CEO turnover during the bankruptcy filing event period. This section also

provides a cross-sectional regression analysis of the determinants of CEO turnover, confirming that

pre-petition creditor control through DIP financing increases the probability of forced turnover.

Section 3 provides estimates of CEO personal bankruptcy costs and its cross-sectional determi-

nants. The cross-sectional model for bankruptcy costs is also used to generate an expected CEO

rehiring probability and PV income loss for each sample CEO, which in turn is used in estimations

of forced and voluntary CEO turnover, and of the compensation package at the distressed firm.

Section 4 describes the CEO equity losses and Section 5 concludes the paper. A full description of

the variables used throughout the paper’s analysis is found in Appendix 1.

2 CEO turnover around bankruptcy

2.1 Sample selection

Our sample selection starts with a list of all 497 Chapter 11 bankruptcy filings in the period 1996-

2007 by US public firms with book assets above $100 million in constant 1980 dollars from the

Bankruptcy Research Database, provided by Professor Lynn LoPucki at UCLA Law School. The

status of the cases are updated as of the beginning of 2011. We eliminate 18 dismissed or pending

cases, leaving us with a total of 479 bankruptcy filings. These cases are matched with Compustat

to obtain firm level financial information. If any information is missing in Compustat, we manually

collect the financial information from 10-Ks in Edgar.

We also collect data on top executive personal characteristics, including name, title, chairman-

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ship, age, gender, tenure, and annual compensation. This information is obtained primarily from

the ExecuComp database. ExecuComp covers S&P large cap 500, midcap 600 and small cap 400

firms. When the stock price declines as the firm approaches bankruptcy, many of the sample firms

drop out of the S&P1500 index and ExecuComp stops its coverage. Moreover, most firms delist

when they file for bankruptcy, in which case they are also dropped from ExecuComp. For this

reason, for three-quarters of the sample firms, we manually collect information on the top execu-

tives from SEC filings, including proxy statements and 10-K forms through Edgar.10 We require

complete information on CEO personal characteristics and compensation to be available in the last

fiscal year before Chapter 11 filing. This restriction eliminates another 137 firms, leaving a final

sample of 342 bankrupt firms. The 342 firms, with a total of 2,197 firm-year observations, is to

our knowledge the largest and most comprehensive sample currently available in the bankruptcy

turnover and compensation literature. The sample firms are distributed across a large number of

two-digit SIC industries. The four industries with the highest representation are communications,

business services, primary metals, and health services.

Table 1 shows the distribution of the Chapter 11 filings in our sample over time. Roughly half of

the firms file for bankruptcy in the 2000-2002 period, with the lowest number of filings occurring at

the beginning and at the end of the sample period. The table also shows the size of the sample firms

in the last fiscal year prior to filing. The average firm has sales and assets of $2.9 billion and $3.3

billion, with a median of $0.7 and $0.8 billion, respectively. The bankruptcy proceedings last for

on average 17 months (median 13 months). One third of the filings are prepackaged (”prepacks”).

In a prepack, the firm negotiates a reorganization plan with its creditors prior to filing. As a result,

prepackaged bankruptcies are resolved quicker, with an average duration of 6 months (median 5

months). Overall, the bankrupt firms emerge as an independent company in two-thirds of the cases,

and are liquidated and acquired in 26% and 10% of the cases, respectively. There are no discernible

trends in duration or outcome over the sample period.

2.2 CEO turnover statistics

CEO turnover is primarily identified from ExecuComp, proxy statements, and 10-Ks. For compa-

nies that stop filing with the SEC after entering bankruptcy, we resort to bankruptcydata.com and

10Many of the sample firms chose to continue filing with the SEC after bankruptcy filing even if they have delisted.

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Factiva news searches to identify whether there is CEO turnover throughout the reorganization

process. We follow each sample firm starting three fiscal years prior to filing and, unless the firm

is liquidated or acquired, ending three fiscal years after the bankruptcy case is resolved.

Panel A of Table 2 shows CEO turnover by year relative to bankruptcy filing. The year of

bankruptcy filing is denoted 0. 111 of the bankruptcy cases are resolved in year 0, 136 cases in

year 1, and 65 cases in year 2. The remaining 30 cases are resolved in years 3-6. Thus, the last

year in our sample is year 9. The 144 firm-year observations in years 4 through 9 are combined

in the table on a single row labeled 4+. There are a total of 532 incidents of CEO turnover,

corresponding to 24% of all firm-years in the sample. The CEO turnover rate is highest while the

firm is restructuring in bankruptcy. As shown in the last column, of the incumbent CEOs in place

at the end of year -3, 56% have left at the end of the year of filing and as many as 81% have left

two years later, when most cases are resolved. The turnover rates in our sample is similar to those

documented in previous studies of bankrupt firms. For example, Gilson (1989) finds that 66% of

incumbent CEOs remain two year after bankruptcy filing or out-of-court restructuring and Betker

(1995) reports that 91% of CEOs in office two years prior to filing have left by the time the firm

emerges from bankruptcy. In a more recent study, Ayotte and Morrison (2009) find that 70% of

incumbent CEOs are replaced within two years of bankruptcy filing.

The information on the departing CEO is incomplete in 57 cases where a new CEO is hired

in the first year that the firm enters our sample. This leaves a final sample of 475 cases of CEO

turnover for which we have information on the departing CEO. Our sample of 475 departed CEOs

is large by the standards of the U.S. bankruptcy literature. For example, the sample size is 77 in

Gilson and Vetsuypens (1993), 75 in Betker (1995), 197 in Hotchkiss (1995), 128 in Khanna and

Poulsen (1995), and 197 in Kang and Mitnik (2010).11 Column 5 of Panel A shows the distribution

of the 475 turnover events relative to bankruptcy filing. Again, the frequency of CEO turnover

is highest while the firm is restructuring in bankruptcy. The average CEO is 54 years old when

leaving the firm and has served as CEO for a period of almost five years. CEOs departing in the

year of bankruptcy filing are somewhat younger (mean 53 years) and have somewhat shorter tenure

(mean 4 years) than CEOs leaving before or after bankruptcy.

11Jiang, Li, and Wang (2011) study a sample silimar to ours. However, they do not trace CEO turnover before orafter bankruptcy, where a large proportion of the CEO turnover takes place in our data.

8

We search Factiva, 10-Ks and proxy statements for the turnover reason for each of the 475

departed CEOs. Panel B of Table 2 presents the distribution of CEO turnover across different

reasons stated.12 The largest group (99 cases or 21%) of CEOs resign for personal reasons. More-

over, 91 (19%) of the CEOs leave because the firm was liquidated or acquired in bankruptcy. The

stated reason for departure is CEO retirement or normal succession for 70 cases (15%). Another 63

CEOs (13%) are pressured to leave by the board, shareholders, or creditors, while 56 CEOs (12%)

leave to pursue other interests. A total of 17 top executives (4%) leave for performance-related

reasons. CEO departure is attributed to a variety of other reasons in 28 cases (6%), including finish

restructuring the company, finish a transition period, return to her own company, investigation,

inquiry by a special committee, etc. Two CEOs leave their position due to illness or death.

We are unable to locate a reason for the turnover in the remaining 49 cases (10%). It is

noteworthy that this category is much smaller than in previous studies. For example, Gilson (1989)

fails to find a reason for 27% of the turnover in his sample, while Denis and Denis (1995) are unable

to locate a turnover reason in 35% of the cases. Our higher success in finding reasons for CEO

turnover is a result of our extensive search for turnover-related information in Factiva news.

CEO departures are classified as either “forced” or “voluntary”. We Follow Huson, Parrino,

and Starks (2001) and Yermack (2006) and consider the turnover to be forced if one of the following

holds:

(1) The reason for turnover is performance related or pressure by the board, shareholders or

creditors.

(2) The CEO resign for personal reasons, to pursue other interests or no reason is given and the

CEO is not employed by another company within a year.

(3) The firm is liquidated or acquired in bankruptcy and the departing CEO is less than 60 years

old.

All other cases of turnover are considered as being voluntary.

A total of 241 CEO departures (51%) are classified as forced and 234 departures (49%) as

voluntary. The 51% forced turnover in our sample is much higher than the fraction of forced

12Our classification of reasons for turnover follows prior studies such as Gilson (1989) and Denis and Denis (1995).

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CEO turnover reported in earlier studies. The primary reason is sample selection: we are the first

to systematically document forced executive turnover for bankrupt firms.13 Evidence on forced

turnover in non-distressed firms is found in, e.g., Parrino (1997), who reports that 13% of departures

are forced, Huson, Parrino, and Starks (2001), documenting 16% forced turnover, and Jenter and

Kanaan (2010), where 24% of all turnover is classified as forced.14 Corporate bankruptcy leads to

dramatic changes in the allocation of corporate control rights. It appears that these governance

changes lead to a higher rate of forced CEO turnover than what is typically observed for non-

distressed firms.

As shown in Panel A of Table 2, the fraction of forced turnover (62%) is highest when the

bankruptcy case is resolved (year 2) and lowest (32%) well before the firm files for bankruptcy (year

-2). Panel B reports the distribution of voluntary and forced departures across different reasons

for turnover. As expected, all departures due to board and stakeholder pressure are considered to

be forced, as are all performance related departures. On the other hand, all departures attributed

to retirement or normal succession, death or illness, or other reasons are classified as voluntary.

More interesting, two-thirds of the CEO departures caused by liquidation or acquisition of the

bankrupt firm are considered forced. Of the CEOs leaving for personal reasons and to pursue other

interests, almost half are classified as forced turnover. Moreover, more than half of the CEOs leaving

without any reason given fail to find new employment within one year, and are thus classified as

forced turnover as well.

While not reported in the table, CEOs that are forced to leave tend to be younger (mean 52

vs. 56 years) and have longer tenure (mean 5 vs. 4 years) than CEOs leaving voluntarily. We’ll

return to these differences in the cross-sectional regressions of forced and voluntary below.

2.3 CEO post-turnover employment

The magnitude of CEO personal bankruptcy costs associated with turnover depends on the CEO’s

subsequent value in the labor market, reflected in her employment opportunities. Another major

13The exception is Gilson (1989). However, he classifies a wide set of reasons that the literature considers normalsuccession as “forced”, such as leaving for personal reasons, no reasons given and the CEO is over 60 years old. Asa result, he reports that 83% of the CEO turnover for distressed firms is forced.

14Lehn and Zhao (2006) study post-takeover CEO turnover and report that 47% of acquirer CEOs are forcedto leave within five years of the acquisition. However, they classify all CEO turnover as forced and the 47% is acumulative number not directly comparable to the fraction forced turnover reported for our sample.

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data contribution of this paper is therefore to carefully track the post-turnover employment for

the 475 departed CEOs. Our tracking procedure begins with identifying whether the CEO stays

as Chairman of the board from proxy statements and 10-Ks for the fiscal year after turnover. We

then search Standard and Poor’s (S&P) Register of Corporations, Directors, and Executives15 and

Who’s Who in Finance and Industry.16 These two publications are, however, not comprehensive in

terms of private company coverage. For executives not found in the above sources, we do extensive

searches of news and press releases through Factiva, we search social media, such as Facebook and

LinkedIn, and other internet sources, such as Wikipedia, and we do direct Google searches. As

it turns out, a majority of the post-turnover employment information is obtained through these

more untraditional searches.17 after a CEO leaves, we follow her employment status for up to three

years after turnover. In addition, we record the year, or exact starting date when available, for any

subsequent employment. Across all CEOs that find new employment, it takes on average one year

before the former top executive starts in a new job.

Panel A of Table 3 shows the frequency distribution of the 475 CEOs across different categories

of subsequent employment and the fraction of forced and voluntary turnover, and average time to

new employment, for each category.

• One-third of the CEOs (156 or and 33%) have no new employment. This includes 37 former

CEOs that retire or die, 11 in prison or under investigation, one that pursues a degree, 83

who simply cannot be found in any of the sources mentioned above for at least three years

after turnover, and 24 for whom it takes more than four years to find a new job.

• Seven percent (33) of former CEOs stay as Chairman of the board of the sample firm. Another

46 CEOs (10%) retain an honorary position at the firm, such as Chairman emeritus, vice-

Chairman, or consultant. A vast majority of these CEOs leave voluntarily (91% and 74%,

respectively).

• 70 top executives (15%) become CEO at a private firm. The average time to new employment

is 1.4 years and almost two-thirds of these CEOs are forced to leave.

15As an example, the 2001 edition provides information on 90,000 public and private companies, their 400,000 keyexecutives, and over 70,000 biographies of top company officials.

16This publication contains professional credentials of senior executives of the largest U.S. firms and other leadersin finance and business. Prior to 2004, it was named Marquis Who’s Who in Finance and Industry.

17Our novel search methods generate much better coverage than earlier studies such as Gilson (1989).

11

• Another 29 executives (6%) become CEO at a public firm. Less than half of these CEOs left

voluntarily.

• Twenty percent of the managers become a non-CEO executive or director at a public (52

cases) or private (44 cases) firm.

• The remaining CEOs become self-employed (26 cases or 5%) or consultants or politicians (19

cases or 4%).18

We collect information on the total assets, sales, number of employees, and industry for the 195

companies that employ the departed CEOs. For public firms, this information is from Compustat.

For private firms, we search a multitude of sources, including Capital IQ, Factiva, Business Week,

Forbes, Wikipedia, LinkedIn, and we do direct Google searches. Panel B of Table 3 shows the

industry and sales of these 195 firms. Almost one-third (29%) of firms are in the same two-digit

industry as the sample firm. For departed CEOs that join a public firm, whether as CEO or not,

the sales of the new and old company are of similar magnitude. In contrast, private firms hiring

former top executives are significantly smaller than the sample firms where the managers used to

work (median sales of $118-$270 million versus $851-$862 million for the sample firms).

Table 4 reports the percent departed executives obtaining different types of new employment by

departure year relative to bankruptcy filing (Panel A), CEO age (Panel B), and reason for departure

(Panel C). There are a few discernible differences in the frequency of the type of new employment

depending on the year of CEO departure. One is that the proportion of executives who stay as

Chairman or retain an honorary position with the firm is higher for CEOs who leave their position

prior to bankruptcy filing compared to CEOs who leave when the bankruptcy case is resolved.

Another is that a relatively high fraction of CEOs leaving during bankruptcy reorganization become

self-employed.

Interestingly, 29% of managers departing after case resolution become CEO at another firm,

compared to only 15% of managers leaving two years prior to filing. Since one would expect

bankruptcy to taint the CEO’s reputation this may seem surprising. However, many of these

CEOs are turnaround specialists who have finished the restructuring job and move on to another

18The latter category excludes former CEOs who are awarded consulting contracts at their old firms. We viewsuch consulting contracts as a type of severance payment.

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assignment. Indeed, 24% of the managers leaving in year 3 and 33% of those leaving in year 4

are restructuring specialists, and more than half of these become CEO or non-CEO executive of

another company.

As shown in Panel B of Table 4, 42% of CEOs who are 60 years or older when they depart do

not find subsequent employment versus 23% of the CEOs below age 50, probably because many

of the older managers chose to retire. On the other hand, 29% of the younger CEOs subsequently

become a top executive at another firm, compared to 15% of the 60+ age group. Finally, Panel C

shows that a relatively high fraction (29%) of managers who resign to pursue other interests become

CEO of another firm, while a relatively large fraction (10%) of CEOs leaving due to retirement or

normal succession tend to stay as Chairman of the board. The fraction of former CEOs who retain

an honorary position with the firm is highest among those who resign for personal reasons (15%)

or are pressured to leave by the board, shareholders or creditors (11%).

Overall, a surprisingly large fraction of the departed CEOs find new employment after leaving

the distressed firm. This is in stark contrast to Gilson (1989), who reports that none of the departed

executives find a new position at a publicly traded firm within a three-year period. In our sample,

as much as 41% of the former managers find new employment as CEO or non-CEO top executive at

another firm (public or private). Another 17% remain with the distressed firm as Chairman of the

board or in an honorary position, such as Chairman emeritus or consultant. Moreover, 9% of the

departed CEOs become consultant, politician or self-employed. Only one-third (33%) of the CEOs

who leave find no new employment, many of which chose to retire. In all, this suggests that the

personal costs from bankruptcy in the form of job loss may not be as large as previously thought.

2.4 Statistics on newly hired CEOs

This section provides information on the new CEOs that are hired by the sample firms to replace

executives that leave. To determine whether a new CEO is internally promoted or externally hired

we search proxy statements, 10-Ks, and Factiva. This search allows us to identify 395 new CEOs,

covering 83% of the CEO departures in our sample. If the new CEO is hired externally, we iden-

tify from 10-Ks and news articles whether she is a turnaround specialist, with prior experience of

restructuring troubled companies. We also collect information on her most recent employment, in-

cluding job title and tenure, and the firm’s name, industry code, sales and assets. We use Wikipedia,

13

LinkedIn, and Google searches for the personal information. When the previous employer is a pri-

vate firm, we search Capital IQ, Forbes, and Business Week for information on industry and firm

size. When it is a public firm, we use Compustat. In addition, we identify whether an employment

contract and a severance agreement is offered to new CEOs hired externally.

Panel A of Table 5 shows selected characteristics of the 395 new CEOs by year. Across the

whole sample period, a majority of new CEOs (225 or 57%) are hired from the outside.19 Of the

external hires, 162 (41%) have prior CEO experience and 71 (18%) are turnaround specialists.20

The average age of the new CEOs is 52 years, which is slightly younger than the departing CEOs,

with an average age of 54 years. As expected, the proportion of new CEOs that are turnover

specialists is highest in the year of bankruptcy filing, while the fraction of new CEOs with prior

CEO experience is highest as the restructured firms emerge from bankruptcy.

Panel B reports characteristics of the 225 new CEOs hired externally, split by whether or not

they were CEO at their old firms. As shown in the table, the average tenure with their previous

employer is 5.7 years. A majority (58%) of these firms are private and about one third (29%) are in

the same two-digit industry as the sample firm. New hires with prior CEO experience used to work

for significantly smaller firms than new hires without CEO experience (mean sales of $8.2 million

versus $27.6 million). Indeed, three-quarters of the new managers without prior CEO experience

come from firms with sales that exceed the sales of the sample firm. Turning to the contract offered

by the distressed firms, there are no discernible differences based on the background of the new

CEO. This holds for the fraction of new CEOs that are offered an employment contract (78%),

the dollar value of the contractual severance pay (mean $1.5 million), and the average size of the

severance payment in percent of salary (162%) and bonus (77%).

In sum, a majority of the new CEOs are hired externally. These new CEOs are restructuring

specialists, have prior CEO experience, or come from much larger firms. Restructuring specialists

are more common hires when the firm restructures in bankruptcy. In contrast, prior CEO expe-

rience is valued especially high when the restructured firm is positioning itself as it emerges from

bankruptcy.

19This is similar to Gilson and Vetsuypens (1993) who report that 59% of the new CEOs are inside replacements.20The category prior CEO experience includes 10 cases where the CEO previously was a partner at her old firm.

Eight of the externally hired CEOs are restructuring specialists with prior CEO experience.

14

2.5 Cross-sectional analysis

2.5.1 Determinants of CEO turnover and the new hire

We next examine the determinants of CEO turnover for financially distressed firms. Table 6 presents

coefficient estimates from multinomial logit regressions of voluntary versus forced turnover (versus

no turnover). One issue of particular interest is the extent to which CEO turnover is affected by

increased creditor control in bankruptcy and other large stakeholders. For this purpose, the table

contains four regression specifications, separately entering variables capturing the control rights of

institutional shareholders, secured creditors and unsecured creditors. The sample is 1,633 firm-

years with a full set of control variables (model 2). The benchmark category is 1,300 firm-years

without any CEO turnover. The number of voluntary and forced turnover in each regression model

is shown at the bottom of the table. To control for the impact of exogenous shocks to specific

industries, all regressions include industry fixed effects at the two-digit industry level.

The first two explanatory variables indicate the time period relative to bankruptcy restructuring.

The variable Before takes the value of one if the firm-year observation is in years -3 and -2 relative to

Chapter 11 filing, and zero otherwise. The variable During indicates that the firm-year observation

is in years -1 to 1. Recall that the bankruptcy case is resolved before the end of year 1 for 72%

of the sample firms. Thus, During tend to represent bankruptcy reorganization and the period

leading up to it, when the restructuring is initiated. The base-line is firm-years largely associated

with the emergence and post-bankruptcy operations of the restructured firm (year 2 and after).

The positive coefficient for During indicates that the CEO turnover rate, both voluntary and

involuntary, is significantly higher around Chapter 11 filing than after the firm has successfully

emerged from bankruptcy. Note also that the coefficient for During is higher for forced turnover

than for voluntary turnover (1.5 versus 0.7 in model 1, the difference being significant at the

5% level). Thus, the likelihood of forced turnover is particularly high around bankruptcy filing,

consistent with the summary statistics presented above in Table 2.

The next set of variables describes characteristics of the CEO. Three of these variables produce

coefficients that are significant in the voluntary turnover decision. The first variable, Age, which

captures CEO age, enters with a positive sign. Thus, older CEOs are more likely to leave voluntarily,

perhaps because they chose to retire. The second variable, Chairman, indicates that the CEO is

15

Chairman of the board and the third variable, Ownpct, measures the percent equity in the bankrupt

firm owned by the CEO. Both Chairman and Ownpct produce negative coefficients, suggesting that

the likelihood of voluntary turnover is lower when the CEO is Chairman and decreases as the CEO’s

ownership stake increases. CEOs with large equity ownership have their wealth closely tied to the

company’s value, which may provide strong incentives to stay in an attempt to rescue the firm.

An indicator for CEO tenure (Tenure) enters with a significantly positive coefficient in the forced

turnover decision for some of the specifications. That is, CEOs with a longer tenure with the firm

are more likely to be forced out, perhaps reflecting a higher degree of entrenchment. In alternative

specifications, not shown here, we enter a dummy variable Incumbent, which takes the value of one

if the CEO is in place in year -3 and zero if she is hired during the sample period. This variable is

highly correlated with CEO tenure, and enters with positive and statistically significant coefficients

in both the voluntary turnover and forced turnover regressions, suggesting higher turnover rate of

incumbent CEOs.

The regressions further include selected firm characteristics. Most of these variables have no

or a marginally significant impact on the turnover probability. The coefficients for Size (log of

total sales) and Tangibility (the ratio of net property, plant and equipment to total assets) are

insignificant across all but one specification. There is some evidence that the degree of financial

distress helps predict the probability that the CEO is forced to leave, consistent with Huson,

Parrino, and Starks (2001). The lower the operating margin (ROA, defined as the ratio of EBITDA

to total assets) and the higher Leverage (total liabilities to total assets), the higher is the likelihood

of forced turnover (both marginally significant at the 10%-level). All regressions include indicators

for industry distress (IndDistress, taking the value of one if the median stock return for the two-

digit industry is below -30% in a given year) and for prepackaged bankruptcy filing (Prepack),

both of which produce statistically insignificant coefficients.21

The next set of variables are intended to capture the influence of various stakeholder groups on

CEO turnover throughout the restructuring process. The first model includes interaction terms be-

tween Large institution and the two time period indicators Before and During. Large institution

is a dummy variable which takes the value of one if institutional investors own more than 25%

21The definition of industry distress follows Acharya, Bharath, and Srinivasan (2007).

16

of the firm’s equity in a given year.22 As shown in Table 6, the interaction term During ×

Large institution produces a negative coefficient, significant at the 5% level, in the regressions

for forced turnover. This suggests that CEOs in firms with high institutional ownership are less

likely to be forced to leave while the firm is restructuring in bankruptcy compared to firms with low

institutional ownership. Since control rights shift to creditors in financial distress and bankruptcy,

institutional shareholders have limited direct influence over the CEO turnover decision.23 However,

it is possible that institutions chose to hold equity in distressed firms whose management they trust

to be of relatively high quality. At the same time, institutional investors may sell out their holdings

in distressed firms where they perceive managerial quality to be low.

The second regression specification instead includes a dummy variable, DIP Financing, which

indicates that the bankrupt firm receives debtor-in-possession (DIP) financing from its prepetition

lenders. More than three quarters of the DIP facilities in our sample is provided by prepetition

lenders, consistent with Dahiya, John, Puri, and Ramirez (2003). The reasons for prepetition

lenders to provide DIP financing range from enforcing governance and the priority of their prep-

etition loans (Skeel, 2003) to continuing prior lending relationship (Li and Srinivasan, 2011).24

The variable DIP Financing enters the regression for forced turnover with a highly significant

and positive coefficient. This suggests that large prepetition lenders, through their DIP financing

provisions, play a major role in the firm’s governance by forcing the incumbent CEO to leave.

The third model focuses on the influence of holders of public unsecured debt and other non-

tradable liabilities. The dummy variables Large bond liability and Large nondebt liability indicate

that public bonds and non-tradable liabilities, respectively, account for more than 70% of the total

liabilities. Again, these governance variables are interacted with the time period dummies Before

and During. We find that firms with large nondebt liabilities are less likely to terminate their

CEOs during bankruptcy restructuring. Nondebt liabilities are primarily held by suppliers and

may indicate that the firm relies heavily on its supplier relationships. As long as the bankrupt firm

22This information is from 13-F filings. The 25% threshold is close to the median fraction of institutional ownershipfor our sample firms in the fiscal year prior to Chapter 11 filing.

23Coelho, Taffler, and John (2010) document that institutional owners tend to sell out as the firm approachesbankruptcy. In Jiang, Li, and Wang (2011), hedge funds pursue an active ownership strategy prior to bankruptcyfor only 7% of the sample firms and acquire sufficient equity to file a 13-D during bankruptcy reorganization for only4% of the firms.

24DIP lenders commonly request that their existing loans are packaged with the DIP loan in order to increase theseniority of the prepetition loan, known as a rollup provision.

17

continues to pay its trade credits, suppliers have few incentives to fire the CEO. Instead, existing

suppliers may prefer to maintain their business relationship with the CEO throughout bankruptcy

reorganization, hoping for a continued business relationship with the restructured firm.25 An alter-

native explanation is that nondebt liabilities are held by highly dispersed creditors who typically

won’t take an active governance role. In the absence of strong creditors, poorly performing CEOs

may simply face less risk of being fired.

The last model enters all the stakeholder control variables at once. Importantly, the coefficients

discussed above all remain significant when entered jointly. In unreported tests we perform logit

regressions of CEO turnover versus no turnover and find the coefficients to be largely consistent

with the ones determining forced turnover in Table 6.

Overall, CEO turnover increases as the firm restructures in bankruptcy. Some of the forced

turnover in bankruptcy seems to be associated with control rights held by prepetition lenders

through a DIP financing facility. At the same time, the likelihood of forced CEO turnover in

bankruptcy is lower when institutions own a large fraction of the firm’s equity, perhaps reflecting

high CEO quality, and when a large fraction of the firm’s liabilities are nondebt liaibilities, such as

trade credits. The influence of lenders on the CEO turnover decision shows the significance of the

shift in control rights to creditors as the firm approaches bankruptcy.

2.5.2 Determinants of the new hiring decision

We study the determinants of the new hiring decision next. Table 7 shows results from multinomial

logit regressions of whether the newly hired CEO is an internal or external candidate (versus no

turnover). We use the same set of control variables and models as in Table 6 above. Again, the

benchmark category is 1,300 firm-years without any CEO turnover. The sample is 1,645 firm-years

with a full set of control variables (model 2), and the number of internal and external replacements

is reported at the bottom of the table. Also as before, all regressions include industry fixed effects

to control for exogenous industry shocks.

The coefficient estimates are largely consistent with the empirical results presented above for the

determinants of voluntary and forced turnover. In general, a higher CEO turnover rate is associated

25Our results are consistent with the example of Hancock Fabrics case presented in the introduction. Hertzel, Li,Officer, and Rodgers (2008) show that bankruptcy filing tend to have a large negative valuation impact on suppliers.

18

with a higher likelihood of a new CEO hire, internal or external. Moreover, forced turnover is often

followed by an outside CEO replacement and vice versa.26

First, we observe that the sample firms are more likely to hire a new CEO, internal or external,

prior to filing (Before) and while restructuring in bankruptcy (During) than after the firm has

emerged from bankruptcy. The probability that the bankrupt firm hires either an internal or

external new CEO increases with the departing manager’s age and is higher when the prepetition

creditors provide DIP financing, both of which are associated with a higher likelihood of CEO

turnover. Moreover, the likelihood of a new external CEO hire decreases with the departing CEO’s

equity ownership (Ownpct), and is lower when the CEO is Chairman and when the fraction nondebt

liabilities in bankruptcy exceed 70% of total liabilities. Also, firms with higher operating margins

(ROA) are less likely to hire managers from the outside, as are firms with a large fraction of

institutional ownership prior to and in bankruptcy. In the light of the results for CEO turnover

reported in Table 6 above, these results all seem intuitive as new CEO hiring follows CEO turnover.

To examine the decision of firing and hiring jointly, we adopt two additional models, none of

which is tabulated in the paper. The first is a multivariate regression with five outcomes: voluntary

turnover with internal succession, voluntary turnover with external succession, forced turnover with

internal succession, forced turnover with external succession, and no turnover. This regression

specification resembles the one in Parrino (1997). We get results that are similar to his, but also

make additional inferences based on our stakeholder control variables. Consistent with Parrino

(1997), older CEOs are more likely to leave voluntary with either internal or external succession.

Moreover, the likelihood that the CEO is forced out and replaced by an external candidate decreases

in the firm’s operating performance and increases in firm leverage.

With respect to stakeholder governance, we find that firms are less likely to go for external

succession when institutions hold a large fraction of the equity. To the extent that institutional

owners tend to invest in distressed firms where they consider management to be of high quality,

they are also less inclined to replace an incumbent manager with an outside candidate. Consistent

with our earlier results, firms with strong oversight by their prepetition lenders (DIP Financing)

are more likely to terminate CEOs followed by either internal or external succession. Also, firms

26See, e.g., Parrino (1997) who reports a higher insider succession rate for voluntary turnover than forced turnoverfor a sample of non-distressed firms.

19

with a large fraction of nondebt liabilities are less likely to dismiss the CEO during restructuring,

thus reducing the likelihood of hiring a new CEO.

The second model not shown here is a bivariate probit regression for turnover and external

succession in the spirit of Borokhvich, Parrino, and Trapani (1996). The advantage of a bivariate

probit regression is that it jointly models the turnover decision and the new hiring decision. As

expected, the correlation coefficient between the turnover model and the new hiring model is

significant at the 1% level, using a likelihood ratio test. As before, we find that CEOs are more

likely to experience turnover and new CEOs are more likely to be hired from the outside during

and prior restructuring compared to the post-emergence period. Moreover, older CEOs tend to be

replaced by external hires. This result differ from the logit models in Table 7 above, where the

likelihood of both internal and external succession increases with the age of the departing CEO.

CEO stock ownership negatively affects both turnover and outsider replacement, consistent with

earlier results. We further find that firms with a relatively large institutional ownership are less

likely to fire their CEO and, conditional on turnover, choose an external replacement. The results

are similar for firms with a large fraction of nondebt liabilities. In contrast, firms with large secured

lenders are more likely to dismiss their CEOs and replace them with external candidates.

Overall, stakeholder influence over the CEO turnover and new hiring decision seem to vary

substantially over the restructuring cycle. As expected, this influence comes from a range of various

stakeholders, including prepetition lenders with strong control rights through DIP financing, from

large institutional investors, and from large holders of nondebt liabilities (primarily trade credits).

Having examined the CEO turnover decision in detail, we now turn to the CEO’s personal costs of

bankruptcy in terms of lost income.

3 Estimating the CEO income loss

One measure of CEO personal bankruptcy costs relates to the loss of income after leaving the

distressed firm. In this measure, we include information on all relevant CEO compensation items

associated with the old and new employment, if any, including severance pay. This section starts by

presenting data on severance pay, often called “golden handshakes”. We then estimate the CEO’s

income at the new position and summarize the income loss as the present value of the change in

20

total CEO compensation, adjusting for severance pay. This present value provides an estimate of

the magnitude of CEO bankruptcy costs. Finally, we analyze how the expected value of the CEO

income loss and rehiring probability affect her decision to leave voluntarily and her compensation

package at the distressed firm.

3.1 CEO severance pay statistics

CEO employment contracts typically specify a minimum separation pay if the CEO is dismissed

for “good reasons”, including departures due to incompetence or poor performance. Severance

is normally not paid if the CEO is asked to leave “for cause”, referring to willful misconduct or

breach of fiduciary duties (Schwab and Thomas, 2004). Similarly, a CEO leaving voluntarily before

expiration of the contract period without a good reason is typically not entitled to any separation

pay. However, boards may—and frequently do—award severance pay at their discretion. Separation

agreements are negotiated and signed right before the CEO leaves the company. These contracts

typically include non-compete and non-solicitation provisions for a period of 1-2 years.27 Also,

CEOs sometimes negotiate to retain employee status, for example by serving as Chairman of the

board, which can be viewed as a form of severance.

While our study is the first to document severance payments around Chapter 11 filings, Fee and

Hadlock (2004), Yermack (2006) and Goldman and Huang (2011) provide evidence on separation

pay outside of financial distress. These papers show that dismissed CEOs are much more likely to

receive severance than CEOs who resign voluntarily. Goldman and Huang (2011) also find that

boards exercise substantial discretion over severance pay in order to facilitate a smooth transition

from the old to the new CEO.

We collect information on severance awards to departing CEOs from 10-Ks and proxy statements

through Edgar and Factiva news searches. Following Yermack (2006), we identify whether the

separation pay is based on an explicit employment contract or is discretionary. The discretionary

part includes lump-sum cash payments, consulting agreements, loan forgiveness, adjustments to

27Goldman and Huang (2011) describe the following example (p. 4), which was reported on www.redherring.comFebruary 20, 2007: “Former Dell CEO Kevin Rollins will receive a $5 million severance package, according todocuments filed by the computer maker, after Mr. Rollins was forced out by founder and Chairman Michael Dell. Thefiling also revealed that Mr. Rollins has agreed not to sue or compete with the company. In the Separation Agreements,Mr. Rollins provided a general release of claims against the company and agreed to certain non competition and nonsolicitation obligations for a period of 12 months following his termination...”.

21

pension plans, and equity compensation adjustments, including continuation of vesting of options

and restricted stocks. For a few cases where Factiva specifies only the total amount of severance,

we assume that the entire payment is contract based.

Table 8 documents the severance paid to the CEO by year of departure (Panel A), reason for

turnover (Panel B), and type of new employment (Panel C). Of the total sample of 475 departed

CEOs, 28% receive severance. The average (median) severance payment, conditional on receiving

severance, is $3.5 million ($1.6 million), of which $1.7 million ($0.5 million) is according to existing

contracts and another $1.8 million ($0.4 million) is discretional, i.e. negotiated upon departure.

The severance pay represents on average an amount close to six times the CEO’s annual pre-filing

salary.

As shown in Panel A, CEOs leaving relatively early in the process are most likely to receive

severance pay. Of the CEOs departing prior to bankruptcy filing (year -1), 39% receive severance.

Conditional on receiving severance pay, the average amount is highest when the firm reorganizes in

bankruptcy, with a relatively large fraction of the severance being discretional in the year of filing

and contractual in the next two years. For example, in the year of bankruptcy filing, the total

average severance payment is $4.5 million (median $1.6 million), of which 75% is discretional. In

the year after filing, the corresponding number is $4.1 million (median $1.4 million), and 38% of

the total amount is discretional.

Panel B of Table 8 shows that CEOs pressured to leave by the board, shareholders, or creditors

receive the highest average severance payment of $7.7 million, while executives leaving to pursue

other interests or with no reason given receive an average separation pay of $1.8 million and $1.3

million, respectively. Consistent with extant work, CEOs that are forced to leave are more likely

to receive a severance package (32% vs. 24%) and tend to receive a higher dollar amount (mean

$4.1 million vs. $2.7 million) than CEOs who leave voluntarily .

Panel C shows that none of the CEOs staying on as Chairman of the old firm receive any

severance pay, consistent with the notion that a chairmanship constitutes a form of separation

compensation. In contrast, CEOs retaining an honorary position with the firm receive severance in

almost half of the cases, with an average payment of $2.3 million. Of executives who subsequently

become CEO at another firm, almost 40% receive severance, compared to 25% and 34% of those

becoming non-CEO executive at a public or private firm, respectively. The highest severance of

22

on average $10.5 million (median $2.8 million), most of which is discretional, is paid to departing

CEOs that end up being self-employed.

3.2 CEO income loss statistics

We collect annual data on CEO compensation starting three fiscal years prior to bankruptcy filing

and ending three fiscal years after the bankruptcy case is resolved. For firms that are liquidated or

acquired in bankruptcy, the compensation data ends in the fiscal year in which the case resolution

is confirmed. The compensation items we collect include salary, bonus, long-term incentive plans

(LTIP), value of restricted stock awards, number of options granted, exercise price, grant date,

maturity date, and value of grant.28 We define cash pay as the sum of salary, bonus, and LTIP

paid in that year.29 We define grants as the total value of all restricted stock and options granted

during the year. Option value is calculated using the Black-Scholes model.30 Total pay is the sum

of cash pay and grants during the year. Our compensation measures are all based on constant 2009

dollars.

To first illustrate the effect of financial distress on CEO compensation paid by firms filing for

bankruptcy, Figure 1 plots the yearly median CEO total compensation for the sample firms and for

a sample of matching firms. The median is computed across all 342 sample firms through year zero

(bankruptcy filing). In subsequent years, the sample is limited to firms that are still restructuring

in bankruptcy or subsequently emerge as public firms. The matching firms are selected from

ExecuComp. We require the matching firm to have the same two-digit industry code as the sample

firm and be closest in sales. If the ratio of sales for the matched firm and the bankrupt firm is less

28Due to the adoption of FAS123, companies report option and stock awards in a slightly different form after2005. For years 2006-2009, we rely on ExecuComp tables “Plan Based Awards” and “Outstanding Equity Awards”to calculate the value of options awarded. To estimate the value of stock awards, we multiply the number of sharesgranted with the year-end closing price of the common stock.

29We do not include “all other cash compensation” listed in the pay tables because this component often includesseverance pay or other types of unstandardized discretionary payments. Note also that item is a minor componentof CEO pay.

30We follow Core and Guay (2002) to estimate the grant date value of options. Since executives frequently exercisetheir options early, this approach assumes that the expected time to exercise is 70% of the option’s stated maturity.When the grant date is missing, it is assumed to be July 1st of that year. The expected stock return volatility ismeasured as the annualized standard deviation of daily stock returns over the fiscal year in which the grant wasmade. A firm must have 50 observations for its volatility to be estimated, or else we use the median of the volatilitydistribution of all firms in ExecuComp in a given year. Following the practice of ExecuComp, we replace the volatilitywith its 5th and 95th percentile, respectively, if it is either below the 5th percentile or above the 95th percentile ofall observations in a given year. Expected dividend yield is the ratio of cash dividends paid in the fiscal year of thegrant and the fiscal year-end stock price. The treasury bond yield corresponding to the option’s expected time tomaturity is used as the risk-free rate.

23

than 0.70 or greater than 1.30, we select a matching firm at the one-digit industry level and closest

in sales.31

As shown in the figure, CEOs of distressed firms experience a significant drop in income com-

pared to their peers as the firms approach bankruptcy. Interestingly, this effect is not long-lasting

from the firm’s perspective. Already in the year after filing, the median CEO compensation of the

sample firms is back at the same level as that of non-distressed industry and size matched peers.

As the restructured firms emerge from bankruptcy, the median CEO compensation increases even

faster than that of non-distressed industry rivals. While not shown here, limiting the graph to firms

that successfully emerge does not change any of the inferences. It appears that restructured firms

emerging from bankruptcy quickly resume paying a competitive compensation in order to attract

and retain high-quality top management.

We next turn to measures of the income loss for the individual CEOs. To estimate the CEO

post-turnover employment income, we have to make a few additional assumptions, the details of

which are described in Table 9. In brief, we use the following procedure:

(1) If the departed executive becomes CEO at a public company, we search ExecuComp for her

new compensation. If the new firm is not in ExecuComp, we use the CEO pay for a matching

firm in ExecuComp with the same two-digit industry code and the closest match in sales,

assets, or number of employees, whichever is available for the new firm. If the executive

becomes CEO at a private company, we use the CEO pay for an industry-size matched public

firm, adjusted with a 12% cut in salary and bonus and a 30% cut in grants following Gao,

Lemmon, and Li (2011).32

(2) If the manager becomes a non-CEO executive or director at another public firm, we use the

average non-CEO pay for the new firm if found in ExecuComp, or else for the closest industry-

size match in ExecuComp. If the new employer is a private firm, we adjust the non-CEO pay

at the matched firm as described above.

(3) If the executive stays with the firm as Chairman of the board, we use the actual compensation

ExecuComp or, if not found, we use the non-CEO Chairman pay of the median firm is sales

31The sales ratio restriction is violated for approximately 20% of the sample firms.32The median sales of the private firms in our sample is close to the median sales of the private firms in Gao,

Lemmon, and Li (2011). We use an average of the coefficient estimates for the public dummy in their Table 6.

24

in the same two-digit industry.33

(4) For executives who become consultants and politicians, we assume an average income of $300

thousand in 1995 US dollars. This is the average salary offered to principals at McKinsey

over the sample period and matches consulting agreements actually observed in our sample.34

(5) For executives who become self-employed, we use the median income of the bottom decile

of ExecuComp firms in number of employees in the same one-digit industry as the sample

firm.35

(6) For executives who get an honorary position or fail to find new employment, we assume an

income of zero.

We exclude 13 cases where the CEO’s income at the old firm is missing and eliminate 16

observations where the CEO receives a total pay at the distressed firm of zero. We further eliminate

27 cases in the top five percentile of the distribution for the percent change in total compensation.

This is because these CEOs have a pre-departure income close to zero, which translates into a

massive percentage pay increase for any new income level. While an executive may take a temporary

pay cut as the financially distressed firm is trying to restructure, we do not consider a zero income

to reflect an equilibrium CEO pay. Accordingly, these extreme cases do not properly represent the

CEO’s true income loss.

We also document the change in income for 92 CEOs that retain their position with the re-

structured firm three years after emergence. These executives were CEO at the start of the sample

period or were hired prior to bankruptcy resolution. We measure their income change from year -3

or the year they were hired to the last fiscal year with available compensation data.

Figure 2 shows histograms of the dollar change in total compensation for the 92 CEOs retaining

their position with the old firm (Panel A) and 81 executives that become CEO at another firm (Panel

33We use the median because there are typically too few firms with a non-CEO Chairman in ExecuComp tosuccessfully match on size.

34For example, Donald Amaral of Coram Healthcare was paid $200 thousand per year in his role as a consultantto the company. The consulting fee for Robert Kaufman to Carematrix Corp. was $250,000 per year. Flag Telecomagreed to pay Andres Bande $350,000 per year as consultant. In some cases, the total consulting fee is listed (ratherthan an annual fee). For example, Lodgian, Inc. agreed to pay Robert Cole a total fee of $750,000 for his consultingservices, while Covanta Energy agreed to pay Scott Mackin a total of $1.75 million. The 1995 dollars is used becausethe first CEO becoming consultant in our sample occurs in 1995.

35We match at the one-digit industry level because many firms in the bottom decile in the two-digit industry havea large number of employees, while the self-employed CEOs in our sample usually have less than five employees.

25

B). Looking at the plots, it is obvious that both distributions are negatively skewed with a median

that exceeds the mean. We report both mean and median values in all tables documenting CEO

income changes. However, to prevent large outliers from distorting our inferences and following

Gilson and Vetsuypens (1993), we focus primarily on median changes below.

Table 10 reports the average and median CEO income at the old firm and in her new post-

turnover position, as well as income changes in both dollars and percent. Panel A of Table 10 shows

the CEOs’ salary and bonus by type of subsequent employment. Panel B adds long term incentive

plans, stock awards and option grants, for the CEOs’ total compensation. There are 420 departed

CEOs as well as 92 CEOs that remain at the helm of the sample firm three years after emergence

from bankruptcy, for a total of 512 cases.

Panel A reports that, for all 512 CEOs, the median total change in annual salary and bonus is

-67% (mean -25%).

As shown in the table, top executives who retain their position with the firm don’t seem to

incur any income losses as a group. On the contrary, CEOs that stay experience a median increase

in salary and bonus of 8% (mean 58%) and in total compensation of 1% (mean 46%). This is

consistent with the evidence in Figure 1 above, suggesting that the restructured firms quickly

resumes paying a competitive compensation to their top executives. Another group that fares

relatively well is executives who stay on as Chairman or are subsequently employed as CEO at

another firm. Neither of these categories experiences any statistically significant drop in salary and

bonus or total compensation.

In contrast, executives who retain an honorary position with the old firm, become a non-CEO

executive at a public firm, move to a private firm, or become a consultant, politician, or self-

employed tend to experience a substantial income drop. The dollar income decline is particularly

large for CEOs that retain an honorary position or fail to find subsequent employment, with a

median change in total income of -$1.1 million, representing a 100% drop. Across all 512 CEOs

(including the 92 executives that stay at the helm of the restructured firm), the median salary

declines by 67% (mean 25%), and the median total compensation drops by 80% (mean 21%).

The last two columns of Table 10 report our estimate for CEO personal bankruptcy costs,

called PV income loss. This is the present value (PV) of the salary and bonus (Panel A) and total

income (Panel B) change. The PV is computed using a 10% discount rate, adjusting for the time it

26

takes for the CEO to find new employment, and assuming that the CEO will earn the new level of

annual compensation until age 65 and thereafter zero. The PV income loss measure is somewhat

different from the income change because it also considers the time left to retirement, and thus the

opportunity income loss for the remainder of the CEO’s career.

Starting with the present value of the loss in salary and bonus, the median is -$1.9 million

(mean -$3.8 million) across all 512 CEOs. This represents 2.6 times the median salary and bonus

previously earned by the CEOs at the distressed firms. In absolute numbers, this is comparable to

Gilson (1989)’s present value estimate of median lost income of $1.1 million, which is around $2.2

million in 2009 dollars. However, the income loss in Gilson (1989) is six times the pre-departure

income, almost twice as much as our estimate. Thus, our bankruptcy cost estimate seems to

represent a relatively smaller cost for the CEOs.

In the following, the PV income loss refers to the total compensation loss and adjusts for any

separation pay received by the departing CEO. Consistent with the evidence on annual income

changes above, the median PV income loss is zero for the subsample of CEOs that remain at the

helm of the restructured firm (mean -$10.1 million). Departing executives who become CEO of a

public firm is another group that experience minimal personal bankruptcy costs, with a median

PV income loss of $74 thousand. CEOs that stay as Chairman also have a zero median PV income

loss (mean -$13.6 million), perhaps because they tend to be close to retirement age. In contrast,

executives that fail to find new employment and those that become consultants or politicians

experience the largest median costs of -$4.4 million (mean -$21.1 million) and -$4.2 million (mean

-$12.4 million), respectively. Across all 512 CEOs, including the ones that retain their job, the

median PV income loss in total pay is -$2.7 million (mean -$16.0 million).

Table 11 shows the change in CEO total compensation and the PV income loss across different

subsamples. In Panel A, the sample is split into no turnover, voluntary turnover and forced turnover.

CEOs who retain their position with the sample firm and thow who leave voluntarily experience

a median PV income loss of zero (mean -$10.1 million) and -$2.2 million (mean -$8.0 million),

respectively. As expected, CEOs that are forced to leave experience much larger personal costs

with a median loss of -$5.1 million (mean -$25.3 million). The panel further identifies 24 CEOs

that were forced to leave and were subsequently charged with allegations of fraud. These CEOs

experience an even larger income loss with a median PV income loss of -$9.6 million (mean -$44.8

27

million), suggesting that their reputation and thus equilibrium wage has taken a big hit.

Panel B reports the change in CEO total income by major categories of subsequent employment.

As expected, departed CEOs without any new employment stand the most to loose, with a median

PV income loss of -$4.4 million (mean -$21.1 million). The subset of CEOs who become consultants

or politicians, self-employed, or retain an honorary position with the firm incur losses of a similar

magnitude (median -$3.9 million, mean -$17.3 million), while those who subsequently become a full-

time employee of another firm (private or public) experience a much smaller median PV income

loss of -$2.4 million (mean -$14.4 million). As documented in Table 10 above, CEOs who retain

their position with the bankrupt firm or who stays on as Chairman of the board have a median PV

income loss of zero.

Panel C shows how the total income loss varies with the year of departure relative to bankruptcy.

CEOs leaving while the firm restructures in bankruptcy experience a median PV income loss of

-$3.3 million (mean -$21.5 million), while the corresponding number for CEOs departing after the

firm has emerged is a lower -$2.2 million (mean -$13.3 million) and -$2.5 million (mean -$11.6

million) for CEOs departing prior to filing.

From Panel D, it is clear that CEOs of age 60 and older experience the largest median drop in

annual total pay (-$0.8 million), but the smallest median PV income loss of -$0.2 million (mean

-$5.4 million). The latter is of course a consequence of the relatively short tenure left of their

professional careers (see Panel B of Table 4). On the other hand, CEOs that are younger than 50

years old experience the largest median PV income loss of -$5.0 million (mean -$26.3 million). This

is somewhat surprising since, as shown above, a relatively large fraction of these young executives

subsequently become CEO (29%) or non-CEO executive (27%) at another firm and a relatively low

fraction (23%) end up without new employment compared to older CEOs.

Panel E shows that the CEO’s tenure does not play a systematic role for the magnitude of

the median PV income loss in the univariate. Nevertheless, CEOs with a tenure exceeding six

years experience the largest annual total compensation loss with a median of -$0.8 million (mean

-$3.4 million). Recall from the regressions in Table 6 above that the probability of forced turnover

increases in CEO tenure. It is possible that these CEOs had the highest pay to start with and that

a large component of their pay was related to entrenchment and power.

Finally, Panel F documents the income change split by the timing of CEO hiring and departure.

28

Incumbent CEOs are in place at the beginning of the sample period (at the end of year -3), while

new CEOs are hired between year -2 and emergence from bankruptcy. Consistent with the results

reported above, CEOs that retain their position through the end of the sample period experience

the lowest bankruptcy costs, whether they are incumbent or new, with a median PV income loss

of -$0.6 million and $0.6 million, respectively. The largest median PV income loss is experienced

by new CEOs that leave the firm prior to Chapter 11 filing (median -$8.4 million, mean -$22.9

million), followed by CEOs leaving during bankruptcy restructuring, whether incumbent (median

-$5.2 million, mean -$28.0 million) or new (median -$3.9 million, mean -$19.3 million). It appears

that the reputation of these CEOs is tainted by the bankruptcy filing, negatively affecting their

future job opportunities and equilibrium pay. However, CEOs that manage to take the firm through

bankruptcy restructuring and leave after emergence experience a much smaller median PV income

loss (-$2.5 million for incumbent CEOs and -$2.2 million for new CEOs).

Table 12 provides further evidence on the income change and the PV income loss to incumbent

CEOs versus newly hired CEOs (Panel A) and for forced versus voluntary departure (Panel B).

Panel A shows that incumbent CEOs who stay as Chairman experience only a slight reduction

in their median annual compensation of -3%. The median PV income loss for this group is zero

(mean -$8.5 million), suggesting that median personal bankruptcy costs are relatively modest. For

incumbent CEOs that leave and find new full-time employment the typical PV income loss is also

small, with a median of -$0.7 million (mean -$11.0 million). In contrast, incumbent CEOs who find

fail to find new employment or become self-employed typically suffer large personal losses, with a

median PV income loss of -$4.2 million (mean -$23.1 million).

The statistics for new CEOs paint a similar picture, with the exception of departed managers

that subsequently become CEO of a public firm. For the new CEOs, the median CEO in this group

experiences an annual income increase of $0.6 million (mean -$1.1 million) or 66% and a PV income

loss of $1.7 million (mean -$19.0 million). For the incumbent CEOs, however, the median CEO

in this group experiences a decline in annual income of -$0.9 million (mean -$2.4 million) or -32%

and a PV income loss of -$17 million (mean -$31.0 million). It is possible that the group of new

managers include many turnover specialists, who we know from above often move on to become

CEO at another firm and who typically incur smaller personal bankruptcy costs.

Panel B supports the earlier evidence that CEOs leaving voluntarily generally fare better than

29

CEOs that are forced to leave. For example, CEOs who find new full-time employment experience

a median PV income loss of -$3.0 million (mean -$20.9 million) after forced turnover, compared to

a loss of zero (mean -$9.0 million) when they leave the firm by their own choice. Further supporting

the conjectures above, departed top executives who become CEO at another public firm after they

leave voluntarily seem to fair relatively well with a median annual income change of $ 0.4 million

(mean $1.4 million) or 67% and a positive PV income loss of -$2.4 million (mean $5.8 million)

compared to a median PV income loss of -$8.5 million (mean $36.3 million) for those that are

forced to leave the distressed firm.36

Overall, our results suggest that CEOs suffer substantial losses in total compensation after

leaving a failing firm that restructures in bankruptcy. The magnitude of their income loss varies

depending on their subsequent employment, but is particularly large if they fail to find a new

full-time job and when they are forced to leave their position with the distressed firm.

3.3 Cross-sectional analysis

3.3.1 Determinants of CEO compensation

Table 13 presents a regression analysis of the determinants of CEO compensation at the distressed

firm. The dependent variable in the first three regressions is the logarithm of total pay in that year

while the dependent variable for the last three regressions is the proportion cash compensation

(salary and bonus) of total pay. We use OLS regressions for total pay and Tobit regressions

for the proportion cash compensation, since the latter is bounded between zero and one. The

sample is 1,524 firm-years from three years before filing to liquidation/acquisition or three years

after emergence for the 342 sample firms. The regressions control for the time period relative to

Chapter 11 filing, whether a new CEO is hired internally or externally, CEO personal information

such as age, tenure, chairmanship, and equity ownership, and firm characteristics including size,

profitability, leverage, and asset tangibility. All variables are defined in Appendix 1.

The first model shows that firms on average pay their CEOs less during and before restructuring

compared to after reorganization. When including CEO and firm characteristics in models (2) and

(3), however, only the negative coefficient for During remains highly significant. This supports

36The ratio of forced turnover is 33% for restructuring specialists compared to 52% for the departing non-specialistCEOs.

30

the earlier inference from Figure 1 that firms tend to pay their CEOs less while restructuring in

bankruptcy compared to both before and after reorganization.

The coefficient for Internal is negative and the one for External is positive, indicating that

internal replacements are paid less and external replacements are paid more than incumbent CEOs.

This is consistent with Gilson and Vetsuypens (1993) who show that newly appointed CEOs with

ties to the departing CEO are typically paid 35% less and outside replacements are paid 36% more

than the CEOs they replace. Translating the logarithms, our coefficient estimates suggest that

internally promoted CEOs are paid 52% less and external replacements are paid 65% more than

staying CEOs.37 Our estimates are higher than those reported by Gilson and Vetsuypens (1993).

The caveat is that their numbers are based on a nonparametric comparison while we control for

key CEO and firm characteristics. The last three columns show that new CEOs hired internally,

and to some extent externally hired CEOs, have a larger proportion of their pay in stock and

option grants. Since newly hired CEOs usually do not have any wealth tied closely with company

performance, awarding grants is one way to achieve a desired performance sensitivity.

The relation of CEO and firm characteristics to compensation is largely consistent with prior

literature. For example, older CEOs have lower total compensation and a relatively large fraction

of their pay is in the form of cash. This is intuitive as CEOs who are close to retirement age may

have less bargaining power and less risk appetite, considering cash more valuable relative to grants.

Also, CEOs with higher stock ownership may prefer cash compensation in order to diversify their

wealth. In addition, we find firm size to affect both the level and structure of pay. CEOs receive

higher pay and a lower fraction cash compensation the larger the firm. Finally, CEOs receive more

cash pay in firms with high leverage, probably because equity is valued less for firms approaching

financial distress.

3.3.2 Effects of expected bankruptcy costs on turnover and compensation

We next try to identify the determinants of CEO personal bankruptcy costs. Table 14 shows

coefficient estimates for the probability that the departed CEO finds new employment and for the

magnitude of the PV income loss. The probability that the CEO is rehired by another firm, shown

37The regression coefficient show that internal CEOs are paid 0.726 less than incumbent CEOs in logarithm of totalpay while external hires are pay 0.499 more in logarithm of total paid. This translates into (1− e−0.726) ∗ 100 = 52%less pay for internal successions and (e0.499 − 1) ∗ 100 = 65% more pay for external replacements.

31

in Model (1), is estimated using a logit model. The dependent variable takes the value of one

if a departing CEO stays as Chairman of the board or is hired by a public or private company

as CEO or non-CEO executive, and zero otherwise. Model (2) presents the results from an OLS

regression for the PV income loss in $ millions, as defined above. The sample is a subset of 442

CEO turnover cases with information on all control variables. The independent variables include

time period dummies, CEO age, tenure, chairmanship, and whether the company is liquidated.

The variable During produces a negative and significant coefficient in the first regression, while

Before is insignificant. This indicates that CEOs who leave during bankruptcy restructuring are

less likely to find new employment with another company and therefore, are more likely to become

self-employed or entirely fail to find new employment compared to CEOs leaving after restructuring.

Neither of the time variables are significant in the second regression, however, showing no systematic

effect of the timing of CEO departure on the expected PV income loss.

Turning to the CEO characteristics, older managers are less likely to be rehired, but have on

average a higher PV income loss. One possible explanation for the first result is that older CEOs

may chose to retire after departure. Since the opportunity cost for a departing CEO of not finding

a job after age 65 is virtually zero by our definition, older CEOs also lose less upon departure. The

probability of being rehired is also lower for managers whose firms are liquidated in bankruptcy.

Liquidation may result from either low going concern values or unsuccessful bargaining in Chapter

11, both suggesting a relatively low quality of the departing CEO.

There is further some evidence that CEOs with longer tenure may be entrenched, having trouble

finding new employment and loosing more rents when leaving the firm. Alternatively, CEOs that

work in the firm for a long period of time may possess a larger portion of firm-specific skills. These

skills may be hard to transfer to other firms or industries, and are therefore valued less in the

labor market. Both explanations suggest that CEOs with longer tenure incur larger personal costs

upon departure. Finally, the coefficient for Chairman is negative and marginally significant in the

PV income loss regression. CEOs that are Chairman have more to lose after departure, largely

reflecting the loss of the rents component of their compensation.

We next study how the expected personal bankruptcy costs affect the turnover probability and

compensation contract of the CEO. From the regressions in Table 14, we generate predicted values

for the probability of being rehired and the PV income loss for the departing CEOs. These pre-

32

dicted values provide ex ante estimates of the expected rehiring probability and expected personal

bankruptcy costs for each individual CEO. We then include each of these ex ante bankruptcy cost

estimates in the two multinomial logit regressions of voluntary and forced turnover shown in Table

15. The baseline sample is 1,244 firm-years with no CEO turnover, for a total sample of 1,548

firm-years. Since some CEO characteristics are already used to predict the probability of being

rehired and the PV income loss, we exclude these variables from the turnover regressions. In the

following, we focus on the effect of our two new ex ante bankruptcy cost estimates. Other key

explanatory variables enter with coefficient estimates that are similar in significance and sign to

the ones reported in Table 6 above, also with the inclusion of the ex ante probability of being

rehired and expected PV income loss.

Model (1) in Table 15 shows that the expected probability of being rehired reduces the proba-

bility of voluntary CEO departure, while failing to explain the likelihood of forced turnover. This

indicates that CEOs with relatively good prospects of outside employment are more likely to chose

to stay with the distressed firm. It is possible that these CEOs are of better quality compared to

other CEOs in our sample. They may have more confidence to turn around the company and thus

decide to stay. It is also possible that CEOs who do not mind being self-employed or retire are

more likely to leave at their own choice. Turning to Model (2), the CEO’s predicted PV income

loss tends to increase the likelihood of voluntary turnover, while it has no effect on forced turnover.

Not surprising, CEOs who expect to incur relatively low personal bankruptcy costs are more likely

to leave voluntarily, for example by retiring. Our ex ante cost estimates and the results they gen-

erate provide a rational explanation for the voluntary CEO turnover decision which has not been

documented in prior literature.

Table 16 shows the relation between expected personal bankruptcy costs and the total amount

and structure of the CEO’s compensation at the distressed firm. The dependent variable is log of

total pay in models (1) and (2), and the proportion cash pay (versus equity based pay) in models

(3) and (4). The sample is 1,325 firm-years from year -3 through liquidation/acquisition or three

years after emergence for the 342 sample firms. Again, we focus below on the effect of our predicted

ex ante personal bankruptcy cost estimates. As before, the other explanatory variables produces

coefficient estimates that are similar to these documented above in Table 13.

The ex ante measure for the rehiring probability produces a positive and significant coefficient

33

in model (1) and a marginally negative coefficient in model (3). That is, CEOs who ex ante are

more likely to find new employment with another company on average receive a relatively high

total compensation at the bankrupt firm. It is possible that the high compensation reflects a high

quality and negotiation power possessed by these CEOs. At the same time, these CEOs are also

more likely to receive a relatively high fraction of equity and option grants in their compensation,

perhaps indented to provide additional incentives to stay. Another possible interpretation of this

result is that CEOs who are close to retirement or simply more entrenched (and thus are less likely

to be rehired) prefer to receive compensation in the form of cash.

Models (2) and (4) include the CEO’s expected PV income loss as a measure for the ex ante

personal bankruptcy costs. The higher the CEO expected PV income loss, the lower the total

compensation and the higher the proportion cash pay. It appears that CEOs who expect to lose

more after departure are likely to extract more rents prior to departure by paying themselves a

higher compensation. One interesting case to this point is Enron’s CEO and Chairman Kenneth

Lay who received $1.3 million of salary, $8.2 million in bonus and long-term incentive plans, in

addition to about $8 million in stock and option grants in the fiscal year end right before Chapter

11 filing. Our results also indicate that CEOs with relatively low personal bankruptcy costs are

more likely to receive a larger fraction of their compensation in cash, perhaps because many of

these CEOs are close to retirement age. Taken together with the results in Table 15, CEOs that

are likely to incur small costs from departure are more likely to leave voluntarily, and receive a

higher proportion cash pay before leaving.

Overall, our results indicate that the ex ante probability of rehiring and expected income loss

strongly predict the decision of CEO voluntary turnover and the design of CEO incentive contracts.

In particular, a high ex ante rehiring probability is associated with lower voluntary turnover and

higher total compensation. Moreover, low ex ante personal bankruptcy costs are associated with

higher voluntary turnover, lower total compensation and a higher proportion cash pay. These

results produce new and unique insights on the determinants of the CEO’s decision to voluntary

leave a financially distressed firm.

34

4 CEO equity loss

Up to now, we have ignored wealth losses associated with the CEOs’ equity holdings in the bankrupt

firm. These equity holdings may be considered a financial investment and therefore independent

of any effects of financial distress on the CEO’s equilibrium compensation. Nevertheless, adding

information on the CEO equity losses from bankruptcy will provide a more complete picture of the

personal costs from financial distress. We therefore collect annual data on CEO stock holdings in

the bankrupt firm, including both shares held and unexercised options. Shares are valued at the

year-end market price and options are valued using the Black-Scholes model following Core and

Guay (2002), as explained above. The data starts three fiscal years prior to bankruptcy filing and

ends three fiscal years after the bankruptcy case is resolved, or in the year of case resolution if the

firm is liquidated or acquired in bankruptcy.

At the end of the fiscal year prior to bankruptcy filing, the median CEO owned 1.5% (mean

6.9%) of the common equity in the financially distressed sample firms, with a median value of $2.2

million (mean $22.8 million). The median value of the equity loss in the last year prior to default

is thus similar in magnitude to the unconditional median PV income loss of -$2.7 million reported

above.

Figure 3 plots the median percent (Panel A) and dollar value (Panel B) of CEO equity ownership

in the sample firms from year -3 through year 3 relative to bankruptcy filing. As a CEO is turned

over, her equity ownership is replaced with that of the new CEO. Thus, the graphs convey an

impression of the CEO equity ownership for a given firm. For comparison, the dotted line shows

the CEO equity ownership for the sample of industry-size matched firms from ExecuComp. The

sample is all 342 bankrupt firms through year 0, and is thereafter limited to the subsample of firms

that emerge from bankruptcy or still are restructuring.38

As shown in Panel A, the matching firm CEOs own about 0.5% of their firms’ equity, with small

variations over time. In contrast, the median equity ownership of the sample firm CEOs drop from

2% in year -3 to 0.6% in the year of bankruptcy filing. This decline could be a combined effect

from sample firm CEOs selling out and from replacement CEOs entering the sample with smaller

equity stakes. After year 1, however, the median equity ownership slowly increases to 1% in year

38The number of cases is 141 in year 1, 99 in year 2, and 77 in year 3.

35

3, probably because the CEOs receive substantial equity grants in the restructured firm to align

their incentives with shareholders.

In Panel B, the median dollar value of the matching firm CEOs’ equity stakes are relatively

stable over time at $15 million, consistent with Panel A. Not surprising, the median equity value

of the sample firm CEOs display a very different pattern. Starting at a level similar to their peers

($12.5 million in year -3), it drops sharply to almost zero in the year of bankruptcy filing, to

thereafter slowly climb up to $5.6 million in year 3. The initial decline in value is a combined result

of the drop in equity ownership percentage documented in Panel A, as well as a decline in the firm’s

stock price as it approaches bankruptcy.

Overall, CEOs of distressed firms make substantial losses on their equity holdings as the firm

approaches bankruptcy. However, once the firms are restructured, CEOs who stay appear to

experience a quick recovery of their equity positions through large stock and option grants. These

grants help the restructured firms achieve a competitive compensation package and align CEO

incentives with shareholder value maximization.

5 Conclusion

Personal CEO bankruptcy costs may affect the financing and investment policy of firms. Earlier

estimates of the magnitude of such costs have suffered from lack of data on CEO career changes

following bankruptcy. Absent such data, bankruptcy costs are estimated assuming a complete loss

of income, causing bankruptcy cost estimates to be overstated. We provide large-sample estimates

of CEO personal bankruptcy costs that, for the first time, account for the CEO’s post-bankruptcy

employment income.

We track CEO employment changes using 342 U.S. public companies filing for Chapter 11

between 1996 and 2007. Surprisingly, two-thirds of departing CEOs find a new job. Of these, 60%

are hired by a new company—many as top executives. Also surprising, for CEOs that retain their

position or become Chairman of the restructured firm, or who become CEO of another public firm,

the median present value of their future income loss is close to zero, suggesting that these CEOs are

not particularly “tainted” by the bankruptcy event. However, the CEOs who fail to find no new

employment experience an income loss with a median present value of $4.4 million (discounted until

36

retirement age). Across the full sample of CEOs, the ex ante expected median personal bankruptcy

cost is -$2.7 million (in constant 2009 dollars).

We also show that CEOs who leave voluntarily suffer lower personal bankruptcy costs than

CEOs who are later forced out (often by creditors). Leaving voluntarily for another full-time

employment opportunity leaves the CEO with a median personal bankruptcy cost of zero, while

those who find new full-time employment after being forced out suffer a median personal bankruptcy

cost of $-3.0 million. A consistent explanation is that CEOs who earn rents prior to bankruptcy

prefer to stay until they are forced out, and then take a pay-cut as the wage is being reset to a

more competitive level in the new full-time employment opportunity.

Our evidence indicates that creditor activism, in particular through debtor-in-possession (DIP)

financing, affects expected CEO personal bankruptcy costs. Creditors take an active interest in

which CEO to replace—and with whom. We also find that the ex ante probability of being rehired

and the ex ante present value of the future income loss help predict voluntary turnover in bankruptcy

as well as the structure of the compensation contract at the distressed firm.

37

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40

Figure 1Index of median CEO total pay by year relative to Chapter 11 filing

Total pay is the sum of salary, bonus, long-term incentive plans, and stock and option grants. Through year 0, thefirst graph plots the CEO pay index for the total sample of 342 firms that filed for Chapter 11 during 1996-2007.After year 0, the plot is restricted to firms that successfully emerge from bankruptcy as an independent companyor still is restructuring in bankruptcy. The matching firms are from ExecuComp, and are matched on sales andtwo-digit industry code if the ratio of sales between the sample firm and the matching firm is between 0.7 and 1.3,and otherwise on the one-digit industry code.

.6.8

11.

2M

ean

CE

O In

com

e In

dex

-3 -2 -1 0 1 2 3Relative Year to Chapter 11

Total Pay of Sample CEOs Total Pay of Matching CEOs

41

Figure 2Histograms of change in CEO total compensation from bankruptcy

Total compensation is the sum of salary, bonus, long-term incentive plans, and stock and option grants. All firmswere publicly traded prior to filing for Chapter 11 in the period 1996-2007, and the bankruptcy case was resolvedby the beginning of 2011. Panel A shows the dollar compensation change for 92 CEOs that were hired before theresolution of bankruptcy and retained their position three years after emergence. Panel B shows the compensationchange for 81 CEOs who left the distressed firm and became CEO at another firm.

A. Compensation change for 92 CEOs retaining CEO position at the old firm

Mean: $ -1,7 mill. Median: $ 0,0 mill. Standard deviation: $ 6,8 mill.; Skewness: -2.4

B. Compensation change for 81 CEOs moving to a new CEO position in a public or private firm

Mean: $ -2,4 mill. Median: $ -0.3 mill. Standard deviation: $ 7,6 mill. Skewness: -3.0

0.2

.4.6

.8

Sam

ple

frequ

ency

-30 -20 -10 0 10Change in total compensation ($ million)

0.1

.2.3

.4.5

Sam

ple

frequ

ency

-40 -30 -20 -10 0 10Change in total compensation ($ million)

42

Figure 3Index of median CEO equity ownership percentage (top graph) and value of equityand options (bottom graph) relative to Chapter 11 filing (year 0) for total sample

Up through year 0, the graphs include the total sample of 342 firms who filed for Chapter 11 during the period1996-2007. After year 0, the graphs include only firms which emerge from bankruptcy as public companies and firmsthat are still in restructuring. The matching firms are identified in ExecuComp, and are matched on size (sales) and2-digit SIC industry code.

.51

1.5

2

-3 -2 -1 0 1 2 3Relative Year to Chapter 11

Ownpct of Sample CEOs Ownpct of of Matching CEOs

05

1015

20

-3 -2 -1 0 1 2 3Relative Year to Chapter 11

ValEquity of Sample CEOs ValEquity of Matching CEOs

43

Table 1Sample description by year

The table shows the number of cases and selected sample characteristics by year of Chapter 11 filing. The sample is342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. Sales and assets are in constant 2009 US dollars,and from the last fiscal year prior to filing. All variables are defined in Appendix 1.

Sales Assets Duration Bankruptcy($ mill.) ($ mill.) (months) Prepack outcome (%)

Emer- Liqui- Acqui-Year N mean median mean median mean median (%) gence dation sition

1996 7 1,972 832 829 593 8.5 4.5 43 43 43 141997 14 1,551 627 1,206 462 21.6 12.9 36 86 14 01998 26 715 389 736 500 19.1 13.3 27 65 27 81999 33 1,311 666 1,646 888 15.9 8.6 39 61 33 62000 56 1,341 684 1,386 582 21.8 18.1 21 57 29 142001 63 3,770 768 3,873 1103 17.1 12.7 17 54 35 112002 57 3,666 988 6,976 1067 13.1 8.9 46 63 19 182003 36 1,077 729 2,028 741 16.0 10.0 31 75 17 82004 16 1,381 561 1,585 766 12.2 10.2 38 88 13 02005 17 5,854 1,017 9,194 770 17.7 16.7 12 71 18 122006 8 1,964 990 1,660 477 9.3 5.6 63 100 0 02007 9 22,329 545 4,178 705 10.2 11.6 33 44 56 0

Total 342 2,912 739 3,278 798 16.6 12.7 30 64 26 10

44

Table 2CEO turnover, age, and tenure by relative year

The table shows CEO turnover and the average age and tenure of the departing CEOs by fiscal years relative tobankruptcy filing, where the year of filing is 0. The sample is 342 large firms filing for US Chapter 11 in 1996-2007.The CEO data starts three years prior to filing and ends three years after emergence or when the firm is liquidated,and spans from year 1993 through 2010. Year 4+ includes year 4 through the end of our sample. The informationon the departing CEO is incomplete in 57 cases where a new CEO is hired in the first year that the firm enters oursample. This is the case for 46 firms in year -3, for 6 firms in year -2, and for 5 firms in year -1. All variables aredefined in Appendix 1.

A: Year relative to Chapter 11 filing

Year CEO Forced % of originalrel. to turnover Departing CEOs turnover CEOs departingfiling N N % N Age Tenure N % at year-end

-3 308 46 15 - - - - - 0-2 335 66 20 60 54.5 5.0 19 32 20-1 342 88 26 83 54.4 5.0 40 48 400 342 100 29 100 52.9 3.9 56 56 561 342 114 33 114 54.3 4.7 62 54 712 247 76 31 76 54.5 5.8 47 62 813 137 29 21 29 57.4 4.2 10 34 844+ 144 13 9 13 53.2 6.5 7 54 -

Total 2,197 532 24 475 54.2 4.8 241 51 -

B: Reason for turnoverAll turnover Forced VoluntaryN % N % N %

Resigned for personal reasons 99 21 45 46 54 55Pursue other interest 56 12 26 46 30 54Pressured by the board, shareholders, creditors 63 13 63 100 0 0Performance related 17 4 17 100 0 0Liquidation or acquisition 91 19 63 69 28 31Retirement or normal succession 70 15 0 0 70 100Death or illness 2 0 0 0 2 100Other reasons 28 6 0 0 28 100No reason given 49 10 27 55 22 45

Total 475 100 241 51 234 49

45

Table 3CEO new employment after departure

The table shows the new employment of the departed CEO (Panel A) and the size of the new firm where she isemployed (Panel B). The sample is 475 CEOs that leave their position between year -2 (where 0 is the year of filing)and three years after emergence or the year of liquidation at 342 large firms filing for US Chapter 11 in 1996-2007.All variables are defined in Appendix 1. The p-value is from a Wilcoxon test of the difference in median between oldand new firms, limited to cases with data on both firms.

A: CEO new employment after departureAll Years to

departures Forced Voluntary new jobN % N % N % mean

Stay as chairman 33 7 3 9 30 91 0.0Retain honorary position at old firm 46 10 12 26 34 74 0.0CEO at a public company 29 6 15 54 14 48 1.3CEO at a private company 70 15 44 63 26 37 1.4Non-CEO executive at a public company 52 11 19 37 33 63 1.2Non-CEO executive at a private company 44 9 16 36 28 64 1.2Consultant or politician 19 4 7 37 12 63 1.1Self-employed 26 5 17 65 9 35 1.3No new employment 156 33 108 69 48 31 -

All departed CEOs 475 100 241 51 234 49 1.0

B: Industry and sales (in $ million) of firms that hire departed CEOs

% firms Old firm New firmin same sales sales

N industry N median N median p-value

Type of new position:CEO at a public company 29 38 20 1,003 29 623 0.39CEO at a private company 70 29 49 851 36 118 0.00Non-CEO executive at a public company 52 25 40 1,755 52 2,260 0.28Non-CEO executive at a private company 44 29 33 862 25 270 0.02

All departed CEOs employed at a new firm 195 29 142 1,066 142 616 0.31

46

Table 4New employment types by relative year, age, and reason for departure

The table shows the percent new employment types for departing CEOs by departure year relative to bankruptcyfiling (Panel A), by age (Panel B), and by reason for CEO departure (Panel C), respectively. The sample is 475CEOs that leave their position between year -2 (where 0 is the year of filing) and three years after emergence or theyear of liquidation at 342 large US firms filing for Chapter 11 in 1996-2007. All variables are defined in Appendix 1.

Type of new employment:

Stay as Retain CEO at Non- Consultant Nochair- honorary a new CEO or Self- newman position firm executive politician empl. empl. Total

All 7 10 21 20 4 5 33 100

A: CEO new employment by year of departure relative to bankruptcy filing

-2 17 17 15 22 5 7 18 100-1 7 12 16 22 4 4 36 1000 10 10 25 16 2 2 35 1001 2 10 19 19 4 11 36 1002 3 4 29 26 5 4 29 1003 7 3 21 17 7 7 38 1004+ 8 8 15 15 8 0 46 100

B: CEO new employment by age at departure

Less than 50 years old 7 7 29 27 2 4 23 10051-60 years old 5 12 18 20 4 4 36 100More than 60 years old 12 10 15 11 5 5 42 100

C: CEO new employment by reason for departure

Resigned for personal reasons 9 15 20 21 4 4 26 100Pursue other interests 4 4 29 30 4 9 21 100Pressured by the board, 5 11 22 11 5 6 40 100

shareholders, or creditorsPerformance related 0 18 24 24 0 0 35 100Liquidation or acquisition 0 4 19 25 4 8 40 100Retirement or normal succession 10 6 10 19 7 3 46 100Death or illness 0 50 0 0 0 0 50 100Other reasons 11 14 32 18 0 7 18 100No reason given 18 12 24 12 2 4 27 100

47

Table 5Characteristics of the new CEOs

The sample is 395 new CEOs that were hired during our sample period, three years before Chapter 11 filing to threeyears after emergence or the year of liquidation at 342 large US firms filing for Chapter 11 in 1996-2007. All variablesare defined in Appendix 1.

A: Characteristics of 395 new CEOs by hiring year

% with% % prior CEO Age

Year relative to bankruptcy N External Specialist experience (mean)

-3 46 50 4 39 50.1-2 66 55 15 32 50.2-1 88 55 15 40 52.60 100 59 28 45 52.11 50 68 22 44 51.92 26 62 19 54 52.83 15 60 13 53 53.64 4 25 0 0 53.5

All 395 57 18 41 51.7

B: Average characteristics of 225 new CEOs hired externally

Prior CEO experience:N All Yes No p-value

CEO characteristics:Length of previous employment (years) 220 5.7 5.8 5.2 0.56

Characteristics of the previous employer of the new CEO:Public firm 225 0.42 0.39 0.48 0.26Same 2-digit industry as sample firm 225 0.29 0.30 0.27 0.65Sales (in $ million) 138 14,841 8,090 27,642 0.00Fraction cases where sales of old firm > sales of sample firm 138 0.55 0.43 0.77 0.00

Characteristics of the new contract with the sample firm:Fraction of CEOs offered an employment contract 225 0.78 0.75 0.84 0.16Severance pay offered (in $ thousands) 225 1,491 1,541 1,362 0.50Severance pay in % of salary 221 162 154 181 0.19Severance pay in % of bonus 221 77 76 79 0.87

48

Table 6Regressions for the probability of forced and voluntary turnover

The table shows the coefficient estimates from multinomial logit regressions for the probability of CEO turnover. Allmodels have three outcomes: no turnover, voluntary turnover, and forced turnover. The sample is 1,633 firm-yearsfrom three years before filing to three years after emergence or the year of liquidation for 342 large firms filing for USChapter 11 bankruptcy in 1996-2007. All regressions control for industry fixed effects at the 2-digit SIC code level.Standard errors are in brackets. ∗∗∗, ∗∗, and ∗ denotes significance at the 1%, 5% and 10% level, respectively. Allvariables are defined in Appendix 1.

(1) (2) (3) (4)Voluntary Forced Voluntary Forced Voluntary Forced Voluntary Forced

Intercept -29.544∗∗∗ -2.653 -29.484∗∗∗ -2.546 -30.688∗∗∗ -2.903∗ -30.516∗∗∗ -2.658[1.522] [1.752] [1.510] [1.638] [1.529] [1.662] [1.545] [1.824]

Relative years:Before 0.330 0.041 0.224 -0.250 0.179 -0.083 0.215 0.323

[0.330] [0.415] [0.274] [0.365] [0.300] [0.386] [0.359] [0.430]During 0.698∗∗∗ 1.508∗∗∗ 0.699∗∗∗ 1.376∗∗∗ 0.794∗∗∗ 1.543∗∗∗ 0.817∗∗∗ 1.734∗∗∗

[0.262] [0.293] [0.241] [0.284] [0.257] [0.297] [0.282] [0.310]CEO characteristics:Age 0.066∗∗∗ 0.004 0.063∗∗∗ 0.009 0.062∗∗∗ 0.008 0.066∗∗∗ 0.004

[0.012] [0.013] [0.012] [0.013] [0.012] [0.013] [0.013] [0.013]Tenure 0.002 0.053∗∗ -0.005 0.033 -0.007 0.029 -0.002 0.052∗∗

[0.024] [0.024] [0.023] [0.022] [0.023] [0.021] [0.024] [0.024]Chairman -0.406∗∗ -0.240 -0.422∗∗ -0.217 -0.403∗∗ -0.161 -0.396∗ -0.270

[0.201] [0.211] [0.197] [0.206] [0.198] [0.206] [0.202] [0.215]Ownpct -0.042∗∗∗ -0.011 -0.032∗∗∗ -0.010 -0.031∗∗∗ -0.012 -0.040∗∗∗ -0.009

[0.014] [0.009] [0.012] [0.009] [0.012] [0.009] [0.014] [0.009]Firm characteristics:Size 0.101 0.038 0.108 -0.014 0.169∗∗ 0.025 0.112 0.006

[0.074] [0.072] [0.070] [0.063] [0.072] [0.065] [0.078] [0.075]ROA -0.754 -1.430∗ -0.631 -1.380∗ -0.442 -1.377∗ -0.625 -1.725∗∗

[0.830] [0.731] [0.806] [0.711] [0.832] [0.715] [0.866] [0.750]Leverage 0.033 0.331∗ 0.038 0.347∗ -0.009 0.416∗∗ -0.042 0.357∗

[0.212] [0.184] [0.205] [0.181] [0.219] [0.188] [0.227] [0.195]Tangibility 0.001 -0.314 -0.059 -0.263 -0.132 -0.358 -0.012 -0.462

[0.557] [0.570] [0.548] [0.546] [0.556] [0.558] [0.566] [0.577]IndDistress 0.074 0.050 0.016 -0.037 -0.020 -0.061 0.051 0.038

[0.281] [0.318] [0.278] [0.316] [0.285] [0.320] [0.287] [0.322]Prepack -0.046 -0.247 -0.107 -0.280 -0.120 -0.368 -0.079 -0.408

[0.361] [0.334] [0.356] [0.330] [0.362] [0.341] [0.369] [0.348]Investors:Before×Large institution -0.169 -0.844 -0.093 -1.016∗

[0.364] [0.563] [0.369] [0.568]During×large institution -0.035 -0.470∗ -0.101 -0.519∗∗

[0.251] [0.242] [0.253] [0.244]CreditorsDIP Financing 0.237 0.586∗∗∗ 0.361∗ 0.586∗∗∗

[0.202] [0.212] [0.210] [0.222]Before×Large bond liability 0.828∗ -0.953 0.877∗ -0.001

[0.479] [1.063] [0.486] [0.766]During×Large bond liability -0.039 -0.294 0.011 -0.283

[0.399] [0.339] [0.404] [0.351]Before×Large nondebt liability -0.558 -0.198 -0.536 -0.213

[0.592] [0.788] [0.598] [0.793]During×Large nondebt liability -0.380 -0.555∗ -0.372 -0.658∗∗

[0.311] [0.287] [0.316] [0.294]

N 1,576 1,633 1,625 1,568of which N(volunt) and N(forced) 165 161 169 164 168 163 164 160Pseudo R2 0.128 0.122 0.123 0.140

49

Table 7Regressions for the probability of internal and of external succession

The table shows the coefficient estimates from multinomial logit regressions for the probability of internal and externalsuccession of the departed CEO. All models have three outcomes: no turnover, internal succession, and externalsuccession. The sample is 1,645 firm-years from three years before Chapter 11 filing to three years after emergence orthe year of liquidation for 342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. All regressions control forindustry fixed effects at the 2-digit SIC code level. Standard errors are in brackets. ∗∗∗, ∗∗, and ∗ denotes significanceat the 1%, 5% and 10% level, respectively. All variables are defined in Appendix 1.

(1) (2) (3) (4)

Internal External Internal External Internal External Internal External

Intercept -28.029∗∗∗ -4.440∗∗∗ -27.919∗∗∗ -4.514∗∗ -28.430∗∗∗ -4.515∗∗∗ -28.134∗∗∗ -4.590∗∗∗

[1.563] [1.650] [1.549] [1.537] [1.558] [1.551] [1.579] [1.679]Relative years:Before 1.213∗∗∗ 0.703∗∗ 0.966∗∗∗ 0.424 0.996∗∗∗ 0.484 1.246∗∗∗ 0.732∗∗

[0.359] [0.319] [0.324] [0.282] [0.344] [0.300] [0.382] [0.33]During 1.354∗∗∗ 1.230∗∗∗ 1.441∗∗∗ 1.056∗∗∗ 1.639∗∗∗ 1.208∗∗∗ 1.579∗∗∗ 1.443∗∗∗

[0.322] [0.260] [0.302] [0.249] [0.315] [0.262] [0.338] [0.277]CEO characteristics:Age 0.039∗∗∗ 0.036∗∗∗ 0.041∗∗∗ 0.034∗∗∗ 0.042∗∗∗ 0.033∗∗∗ 0.042∗∗∗ 0.036∗∗∗

[0.013] [0.012] [0.013] [0.012] [0.013] [0.012] [0.013] [0.012]Tenure -0.014 0.015 -0.021 0.002 -0.025 -0.001 -0.018 0.010

[0.025] [0.023] [0.024] [0.022] [0.024] [0.022] [0.025] [0.023]Chairman -0.381∗ -0.435∗∗ -0.349 -0.487∗∗ -0.327 -0.445∗∗ -0.381∗ -0.431∗∗

[0.218] [0.194] [0.213] [0.188] [0.213] [0.188] [0.219] [0.195]Ownpct -0.019∗ -0.027∗∗∗ -0.017∗ -0.019∗∗ -0.019∗ -0.019∗ -0.018∗ -0.025∗∗

[0.010] [0.010] [0.010] [0.010] [0.010] [0.010] [0.010] [0.011]Firm characteristics:Size 0.048 0.119∗ 0.018 0.071 0.073 0.122∗ 0.026 0.116∗

[0.078] [0.066] [0.072] [0.062] [0.074] [0.064] [0.082] [0.069]ROA -0.169 -1.756∗∗∗ 0.051 -1.532∗∗ -0.183 -1.480∗∗ -0.441 -1.867∗∗∗

[0.952] [0.657] [0.938] [0.637] [0.931] [0.647] [0.957] [0.676]Leverage -0.296 0.292 -0.329 0.346∗∗ -0.217 0.377∗∗ -0.218 0.296

[0.264] [0.179] [0.254] [0.173] [0.260] [0.181] [0.269] [0.189]Tangibility -0.349 0.046 -0.442 0.052 -0.584 -0.002 -0.505 0.024

[0.606] [0.523] [0.598] [0.504] [0.612] [0.512] [0.615] [0.533]IndDistress 0.087 0.113 0.048 0.077 -0.010 0.032 0.065 0.076

[0.323] [0.278] [0.322] [0.271] [0.324] [0.276] [0.325] [0.283]Prepack -0.119 -0.308 -0.183 -0.297 -0.301 -0.308 -0.235 -0.371

[0.383] [0.336] [0.378] [0.330] [0.381] [0.337] [0.387] [0.346]Investors:Before×Large institution -0.413 -0.789∗∗ -0.478 -0.670∗

[0.357] [0.369] [0.366] [0.375]During×Large institution 0.139 -0.564∗∗ 0.080 -0.611∗∗∗

[0.261] [0.238] [0.261] [0.240]Creditors:DIP Financing 0.468∗∗ 0.345∗ 0.488∗∗ 0.407∗∗

[0.215] [0.192] [0.224] [0.203]Before×Large bond liability -0.060 0.566 -0.183 0.518

[0.587] [0.433] [0.599] [0.457]During×Large bond liability 0.003 -0.398 0.080 -0.346

[0.392] [0.352] [0.398] [0.362]Before×Large nondebt liability 0.248 -1.972∗ 0.255 -1.887∗

[0.465] [1.043] [0.469] [1.048]During×Large nondebt liability -0.903∗∗ -0.509∗ -0.885∗∗ -0.599∗∗

[0.362] [0.280] [0.365] [0.286]

N 1,587 1,645 1,638 1,580of which N(internal) and N(external) 143 194 146 199 146 198 143 193Pseudo R2 0.115 0.109 0.114 0.127

50

Table 8Severance pay to departing CEOs

The table shows the severance payment in $ thousands by the year of CEO departure relative to bankruptcy filing(Panel A), reason for departure (Panel B), and type of new employment (Panel C), respectively. The mean andmedian severance pay is conditional on receiving severance. The last column shows the median severance paymentin percent of the CEO’s salary before turnover. The sample is 475 CEOs who leave their position between two yearsbefore Chapter 11 filing and three years after emergence or the year of liquidation at 342 large US firms filing forChapter 11 in 1996-2007. All variables are defined in Appendix 1.

% CEOs Contractual Discretionalreceiving severance severance Total severance

N severance mean median mean median mean % median %

All 475 28 1,698 517 1,833 376 3,531 582 1,579 306

A: Severance paid by relative year of departure

-2 60 25 1,199 311 1,449 698 2,649 471 2,146 417-1 83 39 1,124 249 739 322 1,863 316 901 2140 100 32 1,126 911 3,407 336 4,533 819 1,602 2691 114 25 2,523 296 1,547 495 4,070 551 1,383 3872 76 24 3,170 1,142 2,148 8 5,317 834 3,002 3483 29 10 1,231 1,011 461 31 1,691 578 1,772 5784+ 13 15 872 872 2 2 875 113 875 113

B: Severance paid by reason for turnover

Resigned for personal reasons 99 41 1,794 562 1,182 407 2,976 538 1,672 313Pursue other interest 56 38 1,486 653 353 0 1,839 361 924 191Pressured by the board, 63 40 3,370 1,091 4,293 1,495 7,663 836 3,333 429

shareholders, or creditorsLiquidation or acquisition 91 1 0 0 314 314 314 314Retirement or normal succession 70 10 877 0 2,041 1,181 2,918 467 3,845 575Death or illness 2 0 0 0 0 0 0 0 0 0Other reasons 28 29 555 489 1,963 1,169 2,518 310 1,431 202No reason given 49 39 728 494 607 212 1,334 709 901 224

Forced 241 32 1,919 611 2,206 391 4,125 654 1,772 339Voluntary 234 24 1,380 400 1,294 313 2,674 474 1,469 244

C: Severance paid by type of new employment of the departed CEO

Stay as chairman 33 0 0 0 0 0 0 0 0 0Retaining honorary position 46 46 425 0 1,868 524 2,292 317 1,271 238CEO at a public company 29 38 1,912 1,701 2,377 914 4,289 665 2,561 387CEO at a private company 70 40 2,810 880 922 128 3,733 803 1,328 200Non-CEO executive at a public company 52 25 1,609 395 1,755 429 3,364 514 2,363 599Non-CEO executive at a private company 44 34 1,828 611 1,041 2 2,869 526 899 268Consultant or politician 19 26 58 0 921 422 979 215 422 200Self-employed 26 35 1,797 735 8,653 1,181 10,450 1,373 2,824 600No new employment 156 19 1,779 909 893 32 2,672 453 1,740 313

51

Table 9Methodology for estimating CEO income at new employment

The table describes the methodology used to estimate the CEO’s income at new employment. An industry-size matchis a firm in ExecuComp in the same two-digit SIC industry and closest in sales, assets or employees, whichever isavailable for the new firm. If none of the size variables is available, we use the industry median firm in sales. For theCEO’s income from the old position, we use the first available observation on pay between -3 and plan confirmation.That is, if a CEO is hired in year -2 and left the company in year 0, we use her pay in year -2 as the benchmark.

Type of new employment Methodology for estimating CEO income

Keep the CEO job This category includes CEOs that are in place at the beginning of the sampleperiod or hired prior to the resolution of the bankruptcy case, and who remainCEO of the restructured firm at the end of the sample period. The pay at oldposition for these CEOs is measured in year -3 or the year of hiring. The pay atthe new position is measured as of the last fiscal year that contains compensationinformation. We drop cases where the last available fiscal year on compensationis the year of hiring.

Stay as Chairman We find the non-CEO chairman in the ExecuComp database, if possible. If not,we use the non-CEO Chairman pay of the median firm in sales in the same 2-digitSIC industry.

Retaining honorary position Zero income.

CEO at a public company We find the CEO in the ExecuComp database, if possible. If not, we use theCEO pay for an industry-size matched firm in ExecuComp.

CEO at a private company We use the CEO pay for an industry-size matched firm in ExecuComp. Thematched CEO pay at the public firm is adjusted for private firms pay with a 12%cut in cash pay and 30% cut in grants and total pay following Gao, Lemmon, andLi (2011). This is an average of the coefficients in their Table 6.

Non-CEO executive at a publiccompany

If the new firm is in ExecuComp, we take the average top non-CEO executivepay. If not, we use the average top non-CEO executive pay of an industry-sizematched firm in ExecuComp.

Non-CEO executive at a privatefirm

We use the top non-CEO executive pay for an industry-size matched firm inExecuComp. The matched CEO pay at the public firm is adjusted for privatefirms pay with a 12% cut in cash pay and 30% cut in grants and total pay followingGao, Lemmon, and Li (2011). This is an average of the coefficients in their Table6. For two junior managers in the sample, we take 50% of the level of pay tosenior executives at an industry and size matched firm.

Consultant or politician We assume an annual pay of $300,000 in 1995 dollars. This is close to the medianannual consulting contract offered to some of the departed CEOs. This is alsothe average salary offered to principals at McKinsey over the sample period.

Self-employed We use the median pay for companies in the bottom decile of ExecuComp firmsin number of employees, in the same one-digit SIC industry as the sample firm.

No new employment (retire-ment, death, back to school, jail,under investigation etc.)

Zero income.

52

Tab

le10

CE

Ocom

pen

sati

on

chan

ge

by

typ

eof

new

em

plo

ym

ent

The

table

show

sC

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(Panel

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in2009

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66

53

Table 11CEO total compensation change across various subsamples

The table shows estimates of the change in CEO total compensation (TotalPay) in $ thousands and percent, separatedby reason of turnover (Panel A), type of new employment (Panel B), relative year of departure (Panel C), age (PanelD), tenure (Panel E), and timing of CEO hiring and departure (Panel F) respectively. Compensation change is thedifference in compensation at the new firm and the old firm in the first fiscal year the CEO enters the sample. PVincome loss is the present value of the income change discounted at a 10% rate, assuming that the CEO receives thenew level of pay until age 65 and adjusted for number of years it takes the CEO to find new employment plus anyseverance pay received at departure. The sample is 92 CEOs in place up to three years after emergence and 420CEOs that left their position between year -2 and three years after emergence at 342 large firms filing for US Chapter11 bankruptcy in 1996-2007. We drop observations that lie in the top five percentile in the distribution of percentagechange of total pay and CEOs whose total pay before departure is zero to eliminate extreme values. All variables aredefined in Appendix 1.

Change in total compensation PV incomemean median loss (in $)

N in $ in % in $ in % mean median

All 512 -2,662 -21 -638 -80 -15,998 -2,666

A: Income change by reason for departureNo turnover 92 -1,659 46 2 1 -10,052 0Voluntary 195 -1,915 -23 -654 -85 -8,038 -2,193Forced 225 -3,719 -47 -933 -100 -25,344 -5,136Fraud 24 -7,760 -67 -2,377 -100 -44,834 -9,625

B: Income change by type of subsequent employmentRetain CEO position or chairmanship 122 -1,919 46 -20 -4 -10,930 0Full-time employee at a new company 161 -1,985 26 -310 -33 -14,420 -2,378Consultant/self-employed/honorary position 81 -3,198 -72 -1,035 -100 -17,268 -3,934No new employment 148 -3,717 -100 -1,108 -100 -21,116 -4,378

C: Income change by CEO departure year relative to Chapter 11 filingYear -2 to -1 161 -1,947 -22 -598 -75 -11,581 -2,467Year 0 to 1 202 -3,639 -28 -730 -95 -21,486 -3,299Year 2 and after 149 -2,110 -11 -602 -68 -13,320 -2,182

D: Income change by CEO age at departureLess than 50 years old 142 -2,968 9 -628 -70 -26,262 -5,00651-60 years old 247 -2,658 -28 -630 -80 -14,946 -3,299More than 60 years old 112 -2,496 -47 -762 -100 -5,368 -210

E: Income change by CEO tenure at departureLess than 3 year 161 -2,035 -15 -524 -82 -13,800 -2,6544-6 year 170 -2,605 -11 -628 -72 -16,267 -2,933More than 6 years 175 -3,378 -36 -852 -90 -17,973 -2,607

F: Income change by timing of CEO hiring the departureIncumbent CEOs that stay till 3 years after emergence 41 -2,164 10 -133 -14 -11,271 -646New CEOs that stay till 3 years after emergence 51 -1,254 75 159 26 -9,095 593Incumbent CEOs that leave before Chapter 11 filing 102 -2,084 -29 -662 -96 -10,481 -2,671New CEOs that leave before Chapter 11 filing 31 -2,836 -25 -1,157 -89 -22,920 -8,421Incumbent CEOs leaving after filing (before resolution) 97 -4,606 -52 -1,265 -100 -27,984 -5,235New CEOs leaving after filing but (before resolution) 110 -3,140 -36 -741 -96 -19,269 -3,883Incumbent CEOs that leave after emergence 31 -2,200 -38 -930 -93 -11,725 -2,498New CEOs that leave after emergence 49 -1,010 -21 -520 -84 -5,901 -2,169

54

Table 12CEO total compensation change of incumbent and new CEOs

The table shows estimates of the change in CEO total compensation (TotalPay) in $ thousands and percent. PanelA splits the sample by whether the CEO is in place at the end of year -3 (incumbent) or hired between year -2and bankruptcy emergence (new). Panel B splits the sample on forced or voluntary turnover. Income change is thedifference in total pay at the new and old firm measured in the first fiscal year the CEO enters the sample. PVincome loss is the present value of the total income change discounted at a 10% rate, assuming that the CEO receivesthe new level of pay until age 65, and adjusted for number of years it takes the CEO to find new employment plusany severance payment at departure. The sample is 92 CEOs in place three years after emergence and 420 CEOsthat left their position between year -2 and three years after emergence or liquidation at 342 large firms filing for USChapter 11 bankruptcy in 1996-2007. We drop observations that lie in the top five percentile in the distribution ofpercentage change of total pay and CEOs whose total pay before departure is zero to eliminate extreme values. Allvariables are defined in Appendix 1.

Change in total compensation PV incomemean median loss (in $)

N in $ in % in $ in % mean median

A: Incumbent CEOs vs. newly hired CEOs

All incumbent CEOsRetain CEO position at old firm 41 -2,164 10 -133 -14 -11,271 -646Stay as chairman 19 -823 56 -28 -3 -8,595 0CEO at a public company 8 -2,445 11 -880 -32 -31,011 -17,031CEO at a private company 31 -2,728 27 -131 -9 -14,526 -2,508Non-CEO executive at a public company 19 -949 64 -136 -12 -6,129 -2,013Non-CEO executive at a private company 20 -645 -31 -394 -49 -3,845 -3,035All full-time employment categories 138 -1,735 22 -141 -16 -10,959 -749Other employment or no employment 133 -4,337 -89 -1,352 -100 -23,150 -4,170All newly hired CEOsRetain CEO position at old firm 51 -1,254 75 159 26 -9,095 593Stay as chairman 11 -5,988 28 -322 -41 -22,232 0CEO at a public company 11 -1,139 87 585 66 -18,961 1,710CEO at a private company 27 -2,485 5 -462 -55 -17,619 -2,589Non-CEO executive at a public company 25 -1,075 40 -615 -33 -4,175 -4,092Non-CEO executive at a private company 20 -3,904 32 -127 -2 -32,352 -4,882All full-time employment categories 145 -2,168 48 -26 -6 -14,667 0Other employment or no employment 96 -2,420 -92 -827 -100 -14,914 -4,082

B: Forced departure vs. voluntary departure

All forcedStay as chairman 3 -1,144 73 995 133 -8,429 7,786CEO at a public company 13 -3,096 50 -173 -20 -36,294 -8,537CEO at a private company 38 -3,261 9 -785 -60 -22,597 -6,745Non-CEO executive at a public company 17 -1,981 -10 -620 -62 -16,729 -5,805Non-CEO executive at a private company 14 -1,784 44 71 31 -10,477 2,051All full-time employment categories 85 -2,662 20 -498 -47 -20,899 -2,956Other employment or no employment 140 -4,360 -88 -1,196 -100 -27,922 -5,506All voluntaryStay as chairman 27 -2,891 43 -40 -11 -14,170 0CEO at a public company 6 1,359 66 444 67 5,769 2,430CEO at a private company 20 -1,386 31 -131 -12 -3,304 -100Non-CEO executive at a public company 27 -415 89 428 32 1,497 -1,052Non-CEO executive at a private company 26 -2,538 -23 -569 -63 -23,357 -5,718All full-time employment categories 106 -1,649 37 -169 -18 -9,043 0Other employment or no employment 89 -2,232 -94 -814 -100 -6,871 -2,614

55

Table 13Regressions for CEO compensation

The table shows the coefficient estimates from ordinary least squares (OLS) regressions for the logarithm of totalCEO compensation in columns (1) to (3) and coefficients estimates from Tobit regressions for the proportion cashof the total CEO compensation in columns (4) to(6). The sample is 1,524 firm-years from three years before filingto three years after emergence or the year of liquidation for 342 large firms filing for US Chapter 11 bankruptcyin 1996-2007. All regressions control for industry fixed effects at the 2-digit SIC code level. Standard errors are inbrackets. ∗∗∗, ∗∗, and ∗ denotes significance at the 1%, 5% and 10% level, respectively. All variables are defined inAppendix 1.

(1) (2) (3) (4) (5) (6)

Dependent variable: Log of total pay Fraction cash pay

Intercept 7.472∗∗∗ 8.400∗∗∗ 7.336∗∗∗ 0.966∗∗∗ 0.535 0.675∗

[0.878] [1.099] [1.099] [0.341] [0.385] [0.391]Relative years:Before -0.366∗∗∗ -0.211 -0.137 -0.088∗ -0.125∗∗∗ -0.117∗∗

[0.121] [0.129] [0.128] [0.048] [0.048] [0.048]During -0.768∗∗∗ -0.697∗∗∗ -0.646∗∗∗ 0.086∗ 0.115∗∗ 0.084∗

[0.120] [0.125] [0.127] [0.048] [0.047] [0.048]CEO characteristics:Internal -0.655∗∗∗ -0.735∗∗∗ -0.178∗∗∗ -0.162∗∗∗

[0.149] [0.149] [0.056] [0.056]External 0.393∗∗∗ 0.453∗∗ -0.126∗ -0.151∗∗

[0.183] [0.182] [0.068] [0.068]Specialist 0.282 0.211 0.066 0.047

[0.239] [0.237] [0.089] [0.090]Age -0.019∗∗∗ -0.021∗∗∗ 0.004∗ 0.005∗∗

[0.006] [0.006] [0.002] [0.002]Tenure -0.006 -0.015 -0.004 -0.002

[0.011] [0.011] [0.004] [0.004]Chairman 0.103 0.034 -0.104∗∗∗ -0.088∗∗

[0.093] [0.093] [0.035] [0.036]Ownpct -0.025∗∗∗ -0.020∗∗∗ 0.006∗∗∗ 0.005∗∗∗

[0.004] [0.004] [0.002] [0.002]Firm characteristics:Size 0.261∗∗∗ -0.044∗∗∗

[0.030] [0.012]ROA 0.294 -0.139

[0.386] [0.151]Leverage -0.152 0.162∗∗∗

[0.102] [0.041]Tangibility -0.464∗ 0.036

[0.249] [0.096]IndDistress -0.033 -0.003

[0.134] [0.051]Prepack -0.079 0.136

[0.196] [0.080]

N 1,524 1,404 1,375 1,524 1,404 1,375Adjusted R2 0.082 0.125 0.174 0.057 0.091 0.107

56

Table 14Regressions for the probability that the departed CEO gets rehired and the PV of

the change in CEO total compensation

The table shows the coefficient estimates from a logit regressions for the probability that the departed CEO getsrehired and from an ordinary least squares (OLS) regression of the CEO bankruptcy cost. In regression (1), thedependent variable takes the value of one if the departed CEO stays as chairman, or becomes a CEO or a non-CEOexecutive or director at another firm upon departure. In regression (2), the dependent variable is the PV of incomechange assuming that the CEO receives the new level of pay until age 65, discounted at a 10% rate and adjusted fornumber of years it takes the CEO to find new employment, plus any severance payment at departure. The sampleis 442 CEOs leaving her position between two years before filing and three years after emergence or the year ofliquidation for 342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. Standard errors are in brackets.∗∗∗, ∗∗, and ∗ denotes significance at the 1%, 5% and 10% level, respectively. All variables are defined in Appendix1.

(1) (2)

CEO gets rehired PV of compensation change

Intercept 3.298∗∗∗ -60.810∗∗∗

[0.761] [17.123]

Relative years:Before -0.220 0.451

[0.352] [8.444]During -0.619∗∗ -2.922

[0.243] [5.767]CEO characteristics:Age -0.050∗∗∗ 1.116∗∗∗

[0.013] [0.303]Tenure -0.043∗ -1.152∗∗

[0.024] [0.558]Chairman 0.168 -8.515∗

[0.212] [5.035]Bankruptcy outcome:Prepack 0.554 -2.382

[0.382] [8.971]

Liquidation -0.591∗∗ -7.227[0.268] [6.265]

N 442 434Pseudo R2 / Adjusted R2 0.051 0.032

57

Table 15Expected CEO bankruptcy costs and probability of forced and voluntary turnover

The table shows the coefficient estimates from multinomial logit regressions for the probability of CEO turnover. Allmodels have three outcomes: no turnover (N=1,244), voluntary turnover (N=156), and forced turnover (N=148).The sample is 1,548 firm-years from two years before filing to three years after emergence or the year of liquidationfor 342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. The CEO expected bankruptcy costs are thepredicted values, respectively, from the two regression in Table 14. All regressions control for industry fixed effectsat the 2-digit SIC code level. Standard errors are in brackets. ∗∗∗, ∗∗, and ∗ denotes significance at the 1%, 5% and10% level, respectively. All variables are defined in Appendix 1.

(1) (2)Voluntary Forced Voluntary Forced

Intercept -24.169∗∗∗ -1.894 -26.725∗∗∗ -2.509[1.478] [1.808] [1.375] [1.669]

CEO expected bankruptcy costs:Expected probability of being rehired -4.104∗∗∗ -0.699

[0.886] [0.912]Expected PV of total compensation change 0.051∗∗∗ -0.006

[0.010] [0.010]Relative years:Before -0.045 0.261 0.294 0.265

[0.372] [0.468] [0.369] [0.469]During 0.186 1.741∗∗∗ 1.011∗∗∗ 1.801∗∗∗

[0.308] [0.343] [0.289] [0.330]CEO characteristics:Ownpct -0.045∗∗∗ -0.005 -0.027∗∗ -0.004

[0.014] [0.009] [0.012] [0.009]Firm characteristics:Size 0.115 0.017 0.161∗∗ 0.018

[0.079] [0.078] [0.081] [0.078]ROA -0.862 -1.726∗∗ -1.207 -1.745∗∗

[0.874] [0.800] [0.876] [0.800]Leverage 0.101 0.255 -0.046 0.246

[0.222] [0.205] [0.228] [0.204]Tangibility 0.094 -0.130 0.261 -0.070

[0.579] [0.591] [0.582] [0.592]IndDistress 0.040 -0.002 0.109 0.009

[0.294] [0.335] [0.294] [0.335]Investors:Before×Large institution -0.027 -0.791 0.029 -0.795

[0.375] [0.586] [0.372] [0.586]During×Large institution -0.034 -0.472∗ 0.055 -0.480∗

[0.255] [0.247] [0.254] [0.248]Creditors:DIP Financing 0.340 0.688∗∗∗ 0.340 0.682∗∗∗

[0.213] [0.231] [0.213] [0.230]Before×Large bond liability 0.953∗ -0.001 0.810∗ -0.001

[0.490] [0.580] [0.488] [0.950]During×Large bond liability 0.034 -0.189 0.017 -0.243

[0.407] [0.352] [0.406] [0.353]Before×Large nondebt liability -0.439 -0.133 -0.594 -0.128

[0.597] [0.801] [0.600] [0.802]During×Large nondebt liability -0.433 -0.701∗∗ -0.424 -0.692∗∗

[0.319] [0.304] [0.320] [0.304]

Pseudo R2 0.138 0.140

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Table 16Expected CEO bankruptcy cost and CEO compensation

The table shows coefficient estimates from ordinary least squares (OLS) regressions for the total CEO compensation(models 1 and 2) and the proportion cash pay (models 3 and 4). The dependent variables are log(TotalPay) andCashPay, respectively. The sample is 1,325 firm-years from year -3 to 3 years after emergence or the year of liquidationfor 342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. The CEO bankruptcy costs are the predictedvalues, respectively, from the two regression in Table 14. All regressions control for industry fixed effects at the 2-digitSIC code level. Standard errors are in brackets. ∗∗∗, ∗∗, and ∗ denotes significance at the 1%, 5% and 10% level,respectively. All variables are defined in Appendix 1.

Total CEO compensation Proportion cash pay(1) (2) (3) (4)

Intercept 5.350∗∗∗ 6.354∗∗∗ 1.071∗∗∗ 0.940**[1.121] [1.079] [0.402] [0.382]

CEO expected bankruptcy costs:Expected probability of being rehired 1.471∗∗∗ -0.255∗

[0.414] [0.160]Expected PV of total compensation change -0.009∗∗ 0.004∗∗

[0.005] [0.002]Relative years:Before -0.068 -0.159 -0.141∗∗∗ -0.119∗∗

[0.129] [0.128] [0.049] [0.048]During -0.461∗∗∗ -0.717∗∗∗ 0.052 0.110∗∗

[0.137] [0.127] [0.052] [0.048]CEO characteristics:Internal -0.713∗∗∗ -0.596∗∗∗ -0.131∗∗ -0.161∗∗∗

[0.143] [0.143] [0.054] [0.054]External 0.440∗∗ 0.434∗∗ -0.150∗∗ -0.153∗∗

[0.182] [0.183] [0.069] [0.068]Specialist 0.208 0.178 0.042 0.045

[0.237] [0.238] [0.090] [0.090]Ownpct -0.020∗∗∗ -0.025∗∗∗ 0.004∗∗ 0.005∗∗

[0.004] [0.004] [0.002] [0.002]Firm characteristics:Size 0.259∗∗∗ 0.248∗∗∗ -0.048∗∗∗ -0.046∗∗∗

[0.030] [0.030] [0.012] [0.012]ROA 0.292 0.244 -0.148 -0.131

[0.385] [0.387] [0.152] [0.151]Leverage -0.162 -0.147 0.176∗∗∗ 0.170∗∗∗

[0.101] [0.102] [0.041] [0.041]Tangibility -0.478∗ -0.507∗∗ 0.044 0.042

[0.249] [0.250] [0.096] [0.096]IndDistress -0.021 -0.018 -0.010 -0.010

[0.134] [0.134] [0.051] [0.051]

Adjusted R2 0.175 0.103 0.168 0.105

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Appendix 1: Variable definitions, sources, and mean and median values

This table presents definition and source for all variables used in the study. The sample is 342 large US public firms filing for bankruptcy in 1996-2007 andresolved by the end of 2010. The mean and median values are from the last fiscal year before Chapter 11 filing and in constant 2009 US dollars. Potentiallyunbounded variables are winsorized at the 1% and 99% level. The table uses ”BRD” for Bankruptcy Research Database and ”BD” for BankrutpcyData.com.Bankruptcy plans are obtained from BD, 8Ks, and various US Bankruptcy Courts. The 10Ks, 8Ks, and proxy statements are from EDGAR and the 13Fs fromThompson Reuters Ownership Database. The mean and median values for Panels E and F are based on all departed and newly hired CEOs in the sample,respectively.

Variable name Variable definition Source Mean Median

A. Firm characteristics

Assets Book value of total assets (in $ millions). BRD, BD, Compustat 3,278 798

Sales Total sales (in $ millions). BRD, BD, Compustat 2,912 739

Size Logarithm of total sales (in $ millions). BRD, BD, Compustat

ROA Ratio of EBITDA to book value of total assets. Compustat, 10Ks 0.009 0.039

Leverage Ratio of total liabilities to book value of total assets. Compustat, 10Ks 1.044 0.953

Tangibility Ratio of net PP&E to book value of total assets. Compustat, 10Ks 0.377 0.354

Institution ownership (%) Percent shares owned by institutions. 13Fs 24.4 17.6

Bank loan/liabilities Ratio of the face value of bank loans to total liabilities. Bankruptcy Plans, Compus-tat, CapIQ

0.264 0.208

Bonds/liabilities Ratio of the face value of bonds outstanding to total liabilities. Bankruptcy Plans, Compus-tat, CapIQ

0.393 0.381

Nondebt/liabilities Ratio of total liabilities less bank loans and bonds to total liabilities. Bankruptcy Plans, Compus-tat, CapIQ

0.346 0.284

Board size Total number of directors on the board. 10Ks, Proxy Statements 7.676 7

Nonemployee directors The ratio of the number of directors that are not current or past employeesof the company to board size.

10Ks, Proxy Statements 0.717 1

Classified boards Indicator variable taking the value of one if the board is classified. 10Ks, Proxy Statements,CapIQ

0.416 0

IndDistress Indicator variable taking the value of one if the median stock return inthe two-digit SIC industry is less than -30% in a given year (see Acharya,Bharath, and Srinivasan (2007)).

Compustat 0.190 0

B. Bankruptcy characteristics

Prepack Indicator variable taking the value of one if the bankruptcy is prepackagedor pre-negotiated.

BRD, BD, Bankruptcy Plans 0.304 0

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Appendix 1 continued from previous page

Variable name Variable definition Source Mean Median

DIP Financing Indicator variable taking the value of one if debtor-in-possession (DIP) fi-nancing is obtained from prepetition lenders.

BRD, BD, BankruptcyPlans, Factiva, LexisNexis

0.515 1

Emergence Indicator variable taking the value of one if the firm subsequently emergesfrom bankruptcy.

BRD, BD, Bankruptcy Plans 0.640 1

Acquisition Indicator variable taking the value of one if the firm is acquired inbankruptcy.

BRD, BD, Bankruptcy Plans 0.102 0

Liquidation Indicator variable taking the value of one if the firm is liquidated or con-verted into Chapter 7 in bankruptcy.

BRD, BD, Bankruptcy Plans 0.257 0

Duration Number of months in bankruptcy, from the date of filing to the date of planconfirmation.

BRD, BD, Bankruptcy Plans 16.562 12.650

C. CEO characteristics

Tenure CEO tenure with the firm in years. Execcomp, 10Ks, ProxyStatements

4.840 3

Age CEO age in years. Execcomp, 10Ks, ProxyStatements

52.839 53

Chairman Indicator variable taking the value of one if the CEO is chairman of theboard.

Execcomp, 10Ks, ProxyStatements

0.579 1

Founder Indicator variable taking the value of one if the CEO is the founder of thecompany.

Execcomp, 10Ks, ProxyStatements

0.150 0

Turnover Indicator variable taking the value of one if the CEO with the firm is ter-minated.

Execcomp, 10Ks, ProxyStatements, BD, Factiva

0.257 0

Ownpct Percent of common shares owned by the CEO. Execcomp, 10Ks, ProxyStatements

6.898 1.495

ValEquity Total value of shares and unexercised (unexercisable and exercisable) options(in $ millions), following Core and Guay (1999).

Execcomp, 10Ks, ProxyStatements, CRSP

22.770 2.223

D. CEO compensation characteristics

Salary CEO salary (in $ thousands). Execcomp, 10Ks, ProxyStatements

583 534

Bonus Cash bonus plus non-equity long-term incentives (in $ thousands). Execcomp, 10Ks, ProxyStatements

300 0

Grants Total value of restricted stock granted and new stock options (Black-Scholesvalue) granted (in $ thousands).

Execcomp, 10Ks, ProxyStatements

1,209 23

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Appendix 1 continued from previous page

Variable name Variable definition Source Mean Median

SalaryBonus Salary and bonus (in $ thousands). Execcomp, 10Ks, ProxyStatements

883 656

Totalpay Sum of salary, bonus and grants (in $ thousands). Execcomp, 10Ks, ProxyStatements

2,092 866

CashPay Ratio of salary and bonus to Totalpay. Execcomp, 10Ks, ProxyStatements

0.722 0.923

E. Departed CEOs

Turnover reasons Reasons of turnover include (1) resigned for personal reasons, (2) pursueother interest, (3) pressured by board, shareholders, or creditors, (4) per-formance related, (5) liquidation or acquisition, (6) retirement or normalsuccession, (7) death or illness, (8) other reasons, (9) no reason given.

10Ks, Proxy Statements,

Factiva

Forced Indicator variable taking the value of one if turnover reasons are (3) and(4) in the above definition; the turnover reasons are (1), (2), and (9) butthe CEO is not employed by another company as a CEO immediately afterturnover; the turnover reason is (5) and the incumbent CEO departs priorto age 60.

10Ks, Proxy Statements,Factiva

0.488 0

Severance Indicator variable taking the value of one if separation pay if provided tothe departing CEO.

10Ks, Proxy Statements,Factiva

0.277 0

Contractual severance Separation pay based on contract (in $ thousands), conditional on receivingseverance.

10Ks, Proxy Statements,Factiva

1,373 490

Discretional severance Discretional separation pay including lump-sum cash pay, loan forgiveness,adjustment to pension benefits, consulting contract, and equity incentives,conditional on receiving severance.

10Ks, Proxy Statements,Factiva

1,460 275

Post-departure careers The employment types of departed CEOs, including (1) stay as chairman,(2) retaining honorary position, (3) CEO at a public company, (4) CEO ata private company, (5) non-CEO executive (e.g. CFO, COO, VP, manageretc.) at a public company, (6) non-CEO executive (e.g. CFO, COO, VP,manager etc.) at a private company, (7) consultant or politician, (8) self-employed, (9) no new employment (e.g. retired, death, studying, not foundanywhere etc.).

10Ks, Proxy Statements,Factiva, S&P Register ofCorporations, Directors andExecutives, Marquis Who’sWho in Finance and Busi-ness, Forbes, Businessweek,and LinkedIn.

F. Newly Hired CEOs

External Indicator variable taking the value of one if the new CEO is hired fromoutside the firm.

10Ks, Proxy Statements,BD, Factiva

0.571 1

Specialist Indicator variable taking the value of one if a the new CEO is a turnaroundspecialist.

10Ks, Proxy Statements,BD, Factiva

0.181 0

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Appendix 1 continued from previous page

Variable name Variable definition Source Mean Median

CEObefore Indicator variable taking the value of one if the externally hired CEO holdsCEO position immediately before hiring.

10Ks, Proxy Statements,BD, Factiva.

0.413 0

NewCEOPublic Indicator variable taking the value of one if the externally hired CEO worksat a public firm immediately before hiring.

10Ks, Proxy Statements,BD, Factiva

0.409 0

NewCEOIndMatch Indicator variable taking the value of one if the externally hired CEO worksat a firm that is in the same industry (two-digit SIC) as the new firmimmediately before hiring.

10Ks, Proxy Statements,BD, Factiva

0.293 0

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