EckboThorburnWang_29May2012

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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

This version, May 2012

Abstract

We estimate personal bankruptcy costs of top executives of large U.S. corporations filing forChapter 11. The cost estimate incorporate, for the first time, the executives’ post-bankruptcyemployment income. Surprisingly, as many as half of the executives retain their position with therestructured firm or receive full-time executive employment in another firm, and for this group,the median income-loss until retirement is close to zero. In contrast, executives who are forced

to leave—often at the request of secured creditors providing debtor-in-possession financing—experience a median income-loss until retirement with a present value equal to five times thepre-departure income. We also show that the probability of forced turnover increases withexpected bankruptcy cost. This suggests that some low-quality executives “hang on” to prolongearning supra-competitive labor income—until creditors object—while high-quality executivesleave voluntarily to minimize bankruptcy costs. Finally, we show that bankruptcy filing resultsin substantial equity losses, and that restructured firms restore incentives through large executiveoption and stock grants.

Key words: CEO personal bankruptcy costs, post-bankruptcy employment, creditor control rights

JEL classification: G33, G34

∗The paper has benefited from comments by Naveen Daniel, Fangjian Fu, Wei Jiang, Micah Officer, LynnettePurda, Armin Schwienbacher, Gloria Tian, and David Yermack, as well as participants at the finance seminars atQueens University, Singapore Management University, University of Hong Kong, University of New South Wales,University of Warwick, York University, and at the ECCCS workshop and the Drexel Corporate Governance Confer-ence. We also thank Xiaoya Ding, Sam Guo, Sammy Singh, Lauren Willoughby, Milton Fung, and Hank Yang forresearch assistance. We are grateful for partial financial support for this project from Tuck’s Lindenauer Center forCorporate Governance, from SNF project #1331 (”Krise, omstilling og vekst”), and from Queen’s School of BusinessResearch Program. Emails: [email protected]; [email protected]; [email protected].



1 Introduction

High personal costs of financial distress give risk-averse managers an incentive to hedge against

default by reducing leverage and perhaps under-invest in risky projects. Corporate governance con-

straints and contractual risk sharing arrangements are important tools to address this shareholder

concern (Berk, Stanton, and Zechner, 2010). Establishing an optimal risk-sharing arrangement,

however, requires estimates of the size and determinants of top executives’ personal bankruptcy

costs.

The leading U.S. empirical research on this issue is Gilson (1989) and Gilson and Vetsuypens

(1993) who study Chapter 11 bankruptcies prior to the 1990s. The main purpose of this paper is to

substantially modernize the evidence using large U.S. bankruptcies over the past two decades. This

allows to take advantage of data on post-bankruptcy CEO employment missing in the prior U.S.

literature and which we show is an important component of personal bankruptcy cost estimation.

Furthermore, we are the first to examine the impact on executive bankruptcy costs of the modern,

market-oriented era of Chapter 11 proceedings which emphasizes enhanced creditor control rights.

As documented below, the executives in our sample all incur substantial losses from equity

holdings in their respective firms. However, we are particularly interested in personal bankruptcy

costs resulting from wage reductions (reduction of CEO rents). The labor market response to a

CEO seeking employment after bankruptcy is likely to be complex. On the one hand, in addition to

being associated with the pre-bankruptcy poor firm performance, the filing itself reflects negatively

on top management because it failed to reorganize an inefficient capital structure. On the other

hand, executives gain experience from working through financial distress and bankruptcy. The very

existence of “turnaround specialists”—some of which are hired by our bankrupt firms—suggests

that this experience has market value (Ellis, 2011).

These opposing effects suggest that one must account for cross-sectional variation in CEO

characteristics and post-turnover employment in order to precisely estimate changes in managerial

rents around bankruptcy events. Absent data on post-turnover employment, the existing literature

has simply assumed a labor income stream of zero until retirement. As we show, this assumption

produces a substantial upward bias in the personal bankruptcy cost estimate. To our knowledge,

the only exception to this treatment is Eckbo and Thorburn (2003) who systematically track CEO

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employment income changes following bankruptcies in Sweden.

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 two years prior

to filing until three years after the restructured firm emerges from Chapter 11 (or until liquidation

or acquisition)—a total of 2,234 firm-year observations and 481 CEO turnover incidents in the

period 1993-2010. To our knowledge, this sample is the largest in the bankruptcy turnover and

compensation literature and large also by the standards of the broader turnover literature.

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

of the sample period (at the end of year -3 relative to the year of bankruptcy filing). More than

any other executive, these CEOs are responsible for the bankruptcy event, and so may have the

greatest difficulty in finding high-value new employment. Interestingly, we find that about half of

the incumbent CEOs either stay on as CEO/Chairman of the restructured firm or leave voluntarily

to full-time employment as CEO or non-CEO executives positions elsewhere. For this group of

incumbents, the median estimated income-loss until retirement is close to zero.

In contrast, executives who are forced to leave rarely reappear as executives, and their median

estimated income-loss until retirement has a present value equal to five times the pre-departure

median income (a present value loss of about $5 million in constant 2009 dollars). These estimates

account for severance pay (median value of $1.6 million) but do not include loss of the value of

share holdings in the bankrupt firms (a median loss of $2 million over the year prior to filing) .1

We investigate the role of creditor control rights in affecting the cross-sectional variation in

these personal bankruptcy costs estimates. 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 (Ayotte

and Morrison, 2009; Jiang, Li, and Wang, 2012). Examples include “loan-to-own” (acquisition)

strategies, “prepackaged” filings with a merger agreement in place (Tashian, Lease, and McConnell,

1996), “debtor-in-possession” (DIP) financing (Dahiya, John, Puri, and Ramirez, 2003), and rapid

sale of the firm inside Chapter 11 (Hotchkiss and Mooradian, 1998; Baird and Rasmussen, 2002).2

1The median CEO share holding at the end of year -3 relative to the year of filing is $12 million. As we showthat incumbent CEOs typically do not reduce their share holding when they approach bankruptcy, much of this $12million is lost for CEOs remaining in place at filing.

2Creditor activism was not always accepted by the courts. In the bankruptcy of Sunbeam Oster in the early1990s, Japonica Partners, led by Paul Kazarian, purchased debt claims to influence the bankruptcy outcome—much

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It is perfectly 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 (Jensen and Meckling,

1976; Eckbo and Thorburn, 2003). Yet another concern may be to maintain good, ongoing supplier

relationship developed by the firm’s existing executives.

A few examples of such creditor activism may be useful: Frank Lorenzo, CEO of Eastern

Airlines, was forced out by unsecured creditors in 1990 after a year of operating losses during

Chapter 11 bankruptcy. Lorenzo never returned as an airline executive (Weiss and Wruck, 1998).

In contrast, after Hancock Fabrics Inc. filed for Chapter 11 in 2007, the company’s suppliers formed

an unsecured creditor committee and made sure the pre-filing CEO Jane Aggers stayed on both

through bankruptcy and thereafter. A third scenario is Recotron’s 2003 filing, where senior creditors

replaced the old CEO, appointed Jerry Kalov from the outside, and provided DIP financing with

a covenant stating that removal of Kalov would be considered a default event on the DIP facility.

Overall, CEO turnover in bankruptcy is high: of the incumbent CEOs employed by the firm

two years prior to filing, only 20% remain two years after bankruptcy filing. The annual average

turnover rate in our large sample is 24%, which is similar to that reported elsewhere for firms in

financial distress and bankruptcy (Ayotte and Morrison, 2009; Evans, Nagarajan, and Schloetzer,

2010; Jiang, Li, and Wang, 2012), and it is significantly higher than for solvent firms (Huson,

Malatesta, and Parrino, 2004; Perez-Gonzales, 2006; Kang and Mitnik, 2010; Jenter and Kanaan,

2010).

We define creditor control rights using the firm’s pre-filing debt structure (proportion of bonds

and trade credits), whether the firms files a prepackaged bankruptcy petition, and whether pre-

petition lenders offer DIP financing. As illustrated by the Recoton’s 2003 filing, DIP financing is

particularly effective as it allows the creditor to add control rights directly in the DIP contact. Our

data confirms that the presence of DIP financing significantly increases the probability of forced

CEO turnover. The cross-sectional analysis also shows that forced CEO turnover is less likely when

a large fraction of the firm’s liabilities are trade credits and when institutional owners hold more

than one-quarter of the firm’s equity.

as is commonplace today. However, the court reacted to this investment by refusing to let Kazarian vote his debtclaims under the theory that he effectively was a “shareholder in waiting”. See also Hotchkiss, John, Mooradian, andThorburn (2008) for a review of evidence on creditor involvement in the bankruptcy process.

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Finally, we estimate CEO expected bankruptcy costs in terms of the predicted probability of

being rehired and the predicted present value of 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 is

associated with lower voluntary and forced turnover, and higher total compensation. It is possible

that relatively high quality managers are more confident at turning around the company, trying to

recover some of their equity investment in the distress firm. Moreover, the greater expected present

value of income loss, the lower the voluntary turnover and the higher the forced turnover. This

is consistent with low quality managers staying with the distressed firm in an attempt to extract

rents, and that the most entrenched CEOs are eventually forced out by creditors.

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

and CEO turnover statistics. 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 the CEO income

change and its cross-sectional determinants. We generate the expected CEO rehiring probability

and present value of income loss for each sample CEO, which in turn are used to explain forced and

voluntary CEO turnover, and the compensation package at the distressed firm. Section 5 describes

the CEO equity losses and Section 6 concludes the paper. The Appendix contains a description of

variables and some additional empirical results on compensation changes.

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.

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We also collect data on top executive personal characteristics, including name, chairmanship,

age, tenure, stock ownership, and annual compensation. This information is obtained from the

ExecuComp database or collected manually from SEC filings (proxy statements and 10-K forms)

through Edgar.3 We require complete information on CEO 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. 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. The 342 firms, with a total of 2,234 firm-year observations, is to

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

turnover and compensation literature.

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 on average 17 months (median 13 months). Almost 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. While not shown in the table, 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.

3ExecuComp covers S&P large cap 500, midcap 600 and small cap 400 firms. When the stock price declines asthe 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 fromExecuComp. Nevertheless, many firms continue to file with the SEC after bankruptcy filing even if they have delisted.

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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

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

process.

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

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

1, and 65 cases in year 2. The remaining 30 cases are resolved between year 3 and 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 535 incidents of CEO turnover, corresponding to 24% of all firm-years in the

sample. The CEO turnover rate is highest around the time the firm is restructuring in bankruptcy

(years 0-2), where almost one third of the CEOs are replaced in a given year.

We define an incumbent CEO as the CEO is place at the end of year -3. There is a total of

338 incumbent CEOs. As shown in column 5, 44% of the incumbent CEOs are still in place at

the end of the year of filing (year 0). Only 20% of the incumbent CEOs remain two years later,

when most bankruptcy cases are resolved. The turnover rate in our sample is in line with those

documented in previous studies of bankrupt firms. For example, Gilson (1989) finds that 29% of

incumbent CEOs remain two years after bankruptcy filing.4 Similarly, Betker (1995) reports that

25% of CEOs in office two years prior to the first debt default are still in place when the firm

emerges from bankruptcy.

The information on the departing CEO is incomplete in 54 cases where a new CEO is hired

in the first year that the firm enters our sample.5 This leaves a final sample of 481 cases of CEO

turnover for which we have information on the departing CEO. 6 The average CEO is 55 years old

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

in the year of bankruptcy filing are slightly younger (mean 54 years) and have somewhat shorter

4In Gilson (1989), an incumbent manager is in place at the end of year -2.5This is the case for 50 firms with CEO turnover in year -3 and 4 firms that enter the sample through an initial

public offering (IPO) in year -2.6This sample 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), and197 in Kang and Mitnik (2010). Jiang, Li, and Wang (2012) study a sample silimar to ours. However, they do nottrace CEO turnover before or after bankruptcy, where a large proportion of the CEO turnover takes place in ourdata.

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tenure (mean 5 years) than CEOs leaving before or after bankruptcy.

We search Factiva, 10-Ks and proxy statements for the turnover reason for each of the 481

departed CEOs.7 Panel B of Table 2 presents the distribution of CEO turnover across different

reasons stated. The largest group (102 cases or 21%) of CEOs resign for personal reasons. Moreover,

91 (19%) of the CEOs leave because the firm is liquidated or acquired in bankruptcy. The stated

reason for departure is CEO retirement or normal succession for 72 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 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 50 cases (10%). It is

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

fails to identify 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 resigns 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 voluntary.

A total of 244 CEO departures (51%) are classified as forced and the remaining 237 departures

(49%) as voluntary. The 51% forced turnover in our sample is much higher than the fraction

7Our classification of reasons for turnover follows prior studies such as Gilson (1989) and Denis and Denis (1995).

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of forced CEO turnover reported in earlier studies of non-distressed firms. The primary reason is

sample selection: we are the first to systematically document forced executive turnover for bankrupt

firms.8 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.9

Corporate bankruptcy is associated with 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 is highest (62%) as the firm

emerges from bankruptcy (year 2) and lowest (31%) in year -2, well before the firm files for

bankruptcy. Panel B reports the distribution of forced departures across different reasons for

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

as are all performance related departures. On the other hand, all departures attributed to re-

tirement 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 with-

out 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 53 vs. 57 years) and have longer tenure (mean 6 vs. 5 years) than CEOs leaving voluntarily.

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

Finally, the last two columns of Panel B show the turnover for the 338 incumbent CEOs dis-

tributed across different reasons for departure. In total, 290 incumbent CEOs leave during the

sample period, representing 60% of all departures in the sample. That is, the remaining 191 depar-

tures are made by ”new” CEOs hired between year -2 and until the firm drops out of the sample

(i.e. liquidation/acquisition or three years after the firm emerges from bankruptcy). Incumbent

8The 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.

9Lehn 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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CEOs make up the largest fraction of turnover classified as performance related (82%), retirement

or normal succession (81%), and pressured by the firm’s stakeholders (71%). The smallest fraction

(25%) of incumbent CEOs is found among the departures for other reasons.

2.3 The newly hired CEOs

This section describes characteristics of the new CEOs that are hired by the sample firms to replace

the departing CEOs. 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 348 new

CEOs, covering three-quarters of the 481 CEO departures in our sample. If the new CEO is hired

externally, we identify from 10-Ks and news articles whether she is a turnaround specialist with

prior experience of restructuring distressed companies. We also collect information on her most

recent employment, including job title and tenure, and the firm’s name, industry code, sales and

assets. We use Wikipedia, LinkedIn, and Google searches as sources for the personal information.

When the previous employer is a private 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 3 shows the professional background of the 348 new CEOs by hiring year

relative to bankruptcy filing. Across the whole sample period, a majority of new CEOs (202 or

58%) are hired from the outside.10 The fraction external replacements are highest (68%) in year

1, when the firm is restructuring in bankruptcy. Almost half of all external hires, (93 or 27% of

all new CEOs) have prior CEO experience. The fraction of new CEOs with prior CEO experience

is highest as the restructured firm emerges from bankruptcy firm (38% and 40%, respectively, in

years 2 and 3). Another large group of new CEOs (69 or 20% of all new CEOs) are turnaround

specialists. Five of these were first hired by the sample firm as non-CEO executives and then

promoted internally to CEO. The largest proportion of turnaround specialists (28%) is found in

the year that the firm files for bankruptcy. Finally, 45 (13%) new CEOs, referred to as ”other

external”, have neither prior CEO experience, nor are they restructuring specialists.

Panel B reports characteristics of the 202 new CEOs hired externally, split by their professional

10This is similar to Gilson and Vetsuypens (1993), who reports that 59% of the new CEOs are outside replacements.

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background. The average age of the new CEOs is 52 years, which is somewhat younger than the

departing CEOs (average 55 years). The tenure with their previous employer was on average 5.7

years, similar to the tenure of the CEOs that they replace. Of the firms where the new CEOs used

to work, 40% are public and one-quarter are in the same two-digit industry as the sample firm.

Turnaround specialists, in particular, have frequently worked a firm in a different industry. New

hires with prior CEO experience were employed by significantly smaller firms than other external

new hires (mean sales of $9.7 million versus $30.7 million). Indeed, 83% of the new managers

without prior CEO experience come from firms with sales that exceed those of the sample firm.

Turning to the contract offered by the sample firm, three-quarters of the external hires are offered

an employment contract. The average contractual severance pay is $1.5 million, and highest for

turnaround specialists ($1.6 million) and lowest for new managers without prior CEO experience

($1.3 million).

In sum, a majority of the new CEOs are hired externally. These new CEOs are often restruc-

turing specialists or have prior CEO experience. Restructuring specialists add value to the firm

as it is entering bankruptcy. In contrast, prior CEO experience is valued especially high when the

restructured firm is positioning itself for the future as it emerges from bankruptcy.

2.4 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. A major con-

tribution of this paper is to carefully track the post-turnover employment for the 481 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 Stan-

dard and Poor’s (S&P) Register of Corporations, Directors, and Executives, and Who’s Who in

Finance and Industry. These two publications are, however, not comprehensive in terms of private

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

of news and press releases through Factiva, we search social media and other internet sources (e.g.,

LinkedIn and 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. Af-

ter a CEO leaves, we follow her employment status for three years. We record the starting year

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and month, if available, for any new employment. Conditional on finding new employment, it takes

on average one year before a departed CEO joins a new firm.

Table 4 shows the frequency distribution and average CEO characteristics of the 481 departed

CEOs across different categories of subsequent employment (Panel A), and the frequency distribu-

tion by relatively year of departure (Panel B), and voluntary vs. forced turnover (Panel C).

• One-third of the CEOs (158 or and 33%) find no new employment. This includes 33 executives

that retire, 3 that die, 11 who ends up in prison or is under investigation, one that pursues an

academic degree, 21 that find no new job within three years of departure, and 88 who cannot

be found in any of the sources mentioned above.

• Seven percent (35) of former CEOs stay as Chairman of the board of the sample firm. These

CEOs have relatively long tenure (on average 6.9 years), tend to leave prior to bankruptcy

filing, and a vast majority (91%) step down voluntarily.

• Another 47 CEOs (10%) retain an honorary position at the firm, such as Chairman emeritus,

vice-Chairman, or consultant. Similar to the prior group, these managers tend to depart

relatively early in the restructuring process, and three-quarters leave the CEO position vol-

untarily.

•

71 top executives (15%) become CEO of a private firm. The average time to new employmentis 1.4 years. A large fraction of these managers leave while the firm is restructuring in

bankruptcy, and almost two-thirds are forced to leave.

• Another 29 executives (6%) become CEO at a public firm. Again, most of these managers

leave during bankruptcy restructuring. Roughly half of the CEOs in this group leave volun-

tarily.

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

cases) or private (44 cases) firm. Executives that find new employment with another firm as

CEO or non-CEO executive are relatively young (on average 53-54 years).

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

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cases or 4%).11 Executives that become self-employed have similar characteristics as the ones

staying on as Chairman: they tend to depart during bankruptcy reorganization, have long

tenure (on average 8.1 years) and two-thirds are forced to leave the firm.

Panel D of Table 4 shows the frequency of subsequent employment type split by whether the

departing CEO is incumbent (in place at the end of year -3) or new (hired in year -2 or later).

Recall that 60% of all departing CEOs are incumbent. The incumbent CEOs are slightly over-

represented among executives who stay as Chairman (71%), retain an honorary position with the

firm (77%), and become self-employed (69%). On the other hand, incumbent CEOs tend to be

slightly underrepresented among executives who become CEO (52%) or non-CEO executive (52%)

at another publicly traded firm, or consultant or politician (37%). Overall, the distribution across

different types of subsequent employment is surprisingly evenly distributed across incumbent and

new CEOs.

We collect information on the total assets, sales, number of employees, and industry for the 196

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

private firms, we search Capital IQ, Factiva, Wikipedia and LinkedIn, and we do Google searches.

This information is used below to identify matching firms when we estimate CEO post-employment

compensation. Panel E of Table 4 shows the industry and sales of these 196 firms as well as for the

corresponding sample firms. Almost one-third (30%) of the departed executives join a firm in the

same two-digit industry as the sample firm. For executives joining a public firm, whether as CEO

or not, the sales of the new and old firm are of similar magnitude. Private firms hiring departed

managers, however, are significantly smaller than the sample firms (median sales of $115-$270

million vs. $851-$862 million for the bankrupt firms).

Overall, a large fraction of executives find new employment after leaving the distressed firm

and one out of six departed CEOs join another public 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 7%

of the former CEOs remain with the distressed firm as Chairman of the board, and 9% become

11The 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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consultant, politician or self-employed. Moreover, 10% get an honorary position, such as Chairman

emeritus or consultant. Only one-third 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 vary substantially in the cross-section and may not be as large as previously thought.

3 CEO income loss

We now turn to the CEO’s personal costs of bankruptcy in terms of the loss of income after leaving

the distressed firm. We first present data on actual severance pay, i.e. a lump-sum paid to the CEO

upon departure. We then estimate the CEO’s income at the new position, if any, and summarize

CEO bankruptcy costs as the present value of the change in total compensation. This measure

includes all relevant compensation items associated with the old and new employment, and adjusts

for severance pay and the time to new employment.

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 nor-

mally not paid, however, 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 beforeexpiration of the contract period without a good reason is typically not entitled to any separation

pay. Nevertheless, boards may—and frequently do—award severance pay at their discretion, often

called “golden handshakes”. Separation agreements, which are negotiated and signed right before

the CEO leaves the company, typically include non-compete and non-solicitation provisions for a

period of one to two years. CEOs sometimes negotiate to retain employee status, for example by

serving as honorary Chairman, which can be viewed as a form of severance.

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

13



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. All numbers are in constant 2009 dollars. Following

Yermack (2006), we identify whether the separation pay is based on an explicit employment con-

tract or is discretionary.12 The discretionary part includes lump-sum cash payments, consulting

agreements, loan forgiveness, adjustments to pension plans, and equity compensation adjustments,

including continuation of vesting of options and restricted stocks.

Table 5 documents the severance paid to the CEOs by year of departure relative to bankruptcy

filing (Panel A), forced vs. voluntary turnover (Panel B), incumbent vs. new CEOs (Panel C),

and type of new employment (Panel D). Of the total sample of 481 departed CEOs, 27% 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 ($0.3 million) is negotiated at departure. The severance pay represents on

average an amount close to six times (median three times) the CEO’s annual 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 -2 or -1), 32% receive

severance. Only 19% of the CEOs departing in year 2 or later receive severance. Conditional

on receiving severance pay, however, the amount is lowest for the CEOs leaving prior to filing

(mean $2.1 million vs. $4.3 million for CEOs departing later). On average, 60% of the severance

is discretional for CEOs leaving during bankruptcy restructuring, while 60% of the severance is

contractual for CEOs leaving after the firm has emerged.

Consistent with extant work, CEOs that are forced to leave are more likely to receive severance

pay (32% vs. 23%) and tend to receive a higher dollar amount (mean $4.1 million vs. $2.7 million)

than CEOs who leave voluntarily. Also, incumbent CEOs tend to receive higher total severance

than new CEOs (mean $4.1 million vs. $2.4 million). Most of this difference comes from a much

higher discretional sum paid to incumbent CEOs.

Finally, Panel D shows that one-third of executives who subsequently joins another firm receive

severance, with an average amount of $3.6 million. Of executives who become consultant, self-

12For a few cases where Factiva specifies only a total amount of severance, we assume that the entire payment iscontract based.

14



employed, or retain an honorary position, 38% receive severance. Their total average payment is

slightly higher ($4.2 million) and most (83%) of it is discretional. None of the 35 CEOs staying on

as Chairman of the old firm receive any severance pay.

3.2 CEO income loss statistics

If the CEO’s personal reputation is tainted by the firm’s failure, it should be reflected in a lower

CEO compensation after leaving the distressed firm. To examine this, we collect information on the

CEO’s total pay at the sample firm and compare it to an estimate her income following turnover.

The information on the compensation paid by the sample firms is from ExecuComp, and 10-Ks

and proxy statements through Edgar. We record data for a range of compensation items, including

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.13 We define cash pay as the

sum of salary, bonus, and LTIP.14 Grants are defined as the total value of all restricted stock and

options granted in that year. To estimate the value of stock awards, we multiply the number of

shares granted with the year-end closing price of the common stock. Option value is calculated

using the Black-Scholes model.15 Total pay is the sum of cash pay and grants. All compensation

numbers are denoted in constant 2009 dollars.

To illustrate the 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 non-distressed

matching firms. Note that this figure shows the compensation from the firm’s perspective, also if

the CEO is replaced during the sample period. 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.16 The matching firms are

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

13Due 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.

14We exclude “all other cash compensation” since it often includes severance pay or other discretionary payments.15We follow Core and Guay (2002) to estimate the grant date value of options.16Limiting the entire graph to firms that successfully emerge does not change any of the inferences.

15



closest in sales.17 The top graph shows the dollar median CEO total pay, while the bottom graph

shows a median total pay index.

As shown in the figure, at the start of the sample period the distressed firms’ CEOs have lower

median compensation than their peers ($1.3 million vs. $1.8 million), possibly a result of relatively

poor firm performance. As the sample firms approach bankruptcy, their top executives experience

a significant decline in median total income, to $0.85 million in year -1 and $0.93 million in year

0. This compensation drop is not long-lasting from the firm’s perspective, however. Already in

the year after filing, the median sample firm CEO compensation has returned to a similar level

as that of the non-distressed industry-size matched firms ($1.6 million vs. $1.8 million).18 The

sharp compensation decline around bankruptcy and subsequent rapid bounce back is even more

apparent in the bottom graph that normalizes the income to 1 in year -3 for both samples. It

appears that restructured firms emerging from bankruptcy quickly resume paying a competitive

level of compensation in order to attract and retain high-quality top management.

We next turn to measures of the income loss for the individual CEO. As a proxy for the ”old”

income at the sample firm, we use the income in year -3 or the first year that proxy statements or

10-Ks are available for incumbent CEOs and the income in the year of hiring for new CEOs. To

estimate the CEO’s ”new” post-turnover income, we have to make a few additional assumptions,

the details of which are described in Table 6. In brief, we use the following procedure:

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

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 total pay following Gao, Lemmon, and

Li (2011).19

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

17The sales ratio restriction is violated for approximately 20% of the sample firms.18There appears to be a slight decline in the median CEO total compensation in years -1 and 0 also for the

matched firms. It is possible that there is a general performance decline in the industry, which negatively affects thecompensation for the matched firm CEOs as well. See, e.g., Lang and Stulz (1992).

19The 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.

16



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

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

sales in the same two-digit industry.20

(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. 21

(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.22

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

income of zero.

We eliminate 13 cases with missing data on the CEO’s old income and 16 cases where the

CEO total pay at the sample firm is zero. While an executive may take a temporary pay cut

as the financially distressed firm is trying to restructure, we do not consider a zero pre-turnoverincome to reflect an equilibrium CEO pay. We further eliminate 27 cases in the top five percentile

of the distribution for the percent change in total compensation. These managers either have a

pre-departure income close to zero or receive large initial stock and option grants at their new

firms, both of which translates into a massive percentage pay increase of transitory character.

Accordingly, these extreme cases do not properly represent the CEO’s true long-term income loss.

The restrictions leave a sample of 421 departed CEOs with available income change data.

20We use the median because there are typically too few firms with a non-CEO Chairman in ExecuComp tosuccessfully match on size.

21For 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.

22We 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.

17



We also document the change in income for 103 CEOs that retain their position with the

restructured firm. This category includes incumbent CEOs and new CEOs hired prior to the

resolution of the bankruptcy case, and who remain CEO of the restructured firm three years after

emergence from bankruptcy. The pay at the ”new position” for these CEOs is from the last fiscal

year with available compensation data. We drop 11 cases where the last year with available data

is the year of hiring, for a final sample of 92 CEOs who keep their job with the sample firm.

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

remain with the sample firm (Panel A) and 77 executives that become CEO at another firm (Panel

B). The distributions are negatively skewed with left-tail outliers and a median that exceeds the

mean. We report both mean and median values in the tables documenting CEO income changes.

However, to prevent large outliers from distorting our inferences, we follow Gilson and Vetsuypens

(1993) and focus primarily on median changes below.

Table 7 reports the CEO change in annual total compensation in both dollar amount and

percent. It also presents our estimate for CEO personal bankruptcy costs, labeled ”PV income

change”. This is the present value (PV) of the change in total compensation, using a 10% discount

rate, adjusting for severance and the time it takes 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 change measure differs from the annual compensation change by considering the time left

to retirement, and thus the total value of the CEO’s income loss over the remainder of her career.

We report the PV income change in dollars and as a multiple of the CEO’s pre-turnover annual

total pay. The sample is 421 departed CEOs and 92 CEOs who retain their job, for a total of 513

cases.

As shown in the table, the median sample firm CEO experiences an 80% drop in annual total

compensation. This corresponds to a median PV income change of -$2.7 million (mean -$15.9

million) or 2.7 times her annual pay. In comparison, Gilson (1989) estimates a median present

value of lost income which is close to six times the CEO’s pre-turnover income, i.e. a relative loss

almost twice as large as our estimate.

The table further shows the CEO income change and PV income change across different sub-

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

The 92 CEOs who remain with the firm experience little change in their income (median 1%) and

18



a median PV income change of zero, consistent with Figure 1 above. In contrast, CEOs who leave

voluntarily see their median compensation drop by 85%, for a PV income change of -$2.2 million

or 1.7 times the annual pay. CEOs that are forced to leave experience much larger personal costs

with a median PV income change of -$5.0 million, or 4.9 times the annual compensation. These

large costs suggest that CEOs forced to leave may have been able to extract substantial rents prior

to loosing their position.23

Panel B reports the change in CEO total income by different categories of subsequent employ-

ment. As expected, departed CEOs without any new employment stand the most to loose, with

a median PV income change of -$4.4 million. CEOs who become consultants or politicians, self-

employed, or retain an honorary position with the firm incur costs of a similar magnitude (median

PV income change of -$3.9 million). In contrast, CEOs who retain their position with the bankrupt

firm or who become Chairman of the board have a median PV income change of zero. While not

reported in the table, the median PV of income loss is -$0.4 million across CEOs that remain with

the restructured firm and those that become full-time employee of another firm—private or public.

Details on the CEO income changes and bankruptcy cost estimates for different types of subsequent

employment can be found in Appendix Table 2.

Panel C of Table 7 shows how the loss of income varies with the year of departure relative to

bankruptcy filing. CEOs leaving while the firm restructures in bankruptcy (years 0-1) experience

the largest losses, with a median PV income change of -$3.2 million. The corresponding number is

-$2.1 million for CEOs departing after bankruptcy resolution and -$2.3 million for CEOs departing

prior to filing.

From Panel D, CEOs older than 60 experience the largest median decline in annual total

compensation (-$0.8 million), but the smallest median PV income change of only -$0.2 million.

The latter may be a result of the relatively short time left until retirement (age 65), when the

present value calculation stops. CEOs of age 50 or less experience the largest median PV income

change of -$5.0 million, representing six times their annual pay.

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

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

23For a subset of 28 forced departures where the CEO subsequently was charged with allegations of fraud, themedian PV income change is a stunning -$9.6 million.

19



years experience the largest annual compensation loss with a median of -$0.8 million (-89%). It is

possible that these CEOs have a high pay to start with and that a large component of their pay is

related to entrenchment and power. We will examine this further in the cross-sectional regressions

of forced turnover below.

Panel F documents the income change split by incumbent and new CEOs. Recall that incumbent

CEOs are in place at the end of year -3, while new CEOs are hired in year -2 and thereafter. One

could suspect that incumbent CEOs are more likely to be held responsible for the firm’s failure and

thus suffer a greater income loss. There is, however, little support for this conjecture in the data.

Incumbent CEOs suffer an 88% drop in median annual compensation, for a median PV income

change of -$2.7 million or 2.7 times their annual pay. New CEOs suffer a somewhat smaller decline

in median annual pay of 72%, but a similar median PV income change of -$2.6 million, which

represents 3.0 times their annual pay. It appears that the extent to which a CEO’s reputation is

tainted by bankruptcy depends on her way of managing the firm through the restructuring rather

than when she was hired. Appendix Table 3 provides further details on the income change and the

PV income change for incumbent and new CEOs.

The last panel of Table 7 splits the sample by Chapter 11 outcome. CEOs leaving firms that

liquidate in bankruptcy bear the largest costs, with a median PV income change of -$3.6 million

(4.7 times their annual compensation), while CEOs leaving firms that are acquired in bankruptcy

or successfully emerges experience a median PV income change of -$2.9 million and -$2.5 million,

respectively.

Overall, our results suggest that CEOs suffer large present value losses in total compensation

after they leave firms that file for bankruptcy. The magnitude of the income loss varies substantially

depending on their subsequent employment, but is particularly large when they are forced to leave

their position with the distressed firm. In contrast, executives that remain with the restructured

firm, as CEO or Chairman, or get a full-time position with another firm experience no discernible

median loss of income.

20



4 Cross-sectional analysis

We now turn to a cross-sectional analysis of the probability that the departed CEO is rehired and

the magnitude of her compensation loss. These regressions are used to generate estimates of the

CEO’s ex-ante expected personal bankruptcy costs. We then examine how these expected personal

bankrupt costs affect the probability of forced vs. voluntary turnover and the design of the CEO’s

compensation contract at the sample firm.

4.1 Determinants of CEO personal bankruptcy costs

This section tries to identify the determinants of departed CEO’s personal bankruptcy costs in terms

of failure to find new employment and loss of compensation. Table 8 shows coefficient estimates for

the probability that the departed CEO is rehired and for the annual income change and PV income

change. The probability that the CEO is rehired, shown in models (1)-(3), is estimated using logit

regressions. 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 within three

years of departure, and zero otherwise (self-employed, consultant or politician, honorary position,

and no new employment). Models (4)-(6) present the results from ordinary least squares (OLS)

regressions for the CEO income change (in $ thousand), and in models (7)-(9) the dependent

variable is the PV income change (in $ million). The sample is 448 CEO turnover cases with

complete information on all control variables, and of which 214 CEOs are rehired. Models (1),

(4) and (7) use the full sample, while the next two models are restricted to the subsamples of 281

incumbent CEOs and 167 new CEOs, respectively.

The first two explanatory variables indicate the timing of CEO departure relative to Chapter

11 filing. The variable Before takes the value of one if the CEO departs in year -2 or -1, and zero

otherwise. The variable During indicates that the CEO departs in year 0 or 1. Recall that the

bankruptcy case is resolved before the end of year 1 for 72% of the sample firms. Thus, During

largely represents the actual bankruptcy reorganization. The variable During enters model (1) with

a negative and significant coefficient. The likelihood of finding new employment is lower for CEOs

that leave while the firm is restructuring in bankruptcy than for CEOs who depart after the firm

is successfully restructured. In model (2), both During and Before produce significantly negative

21



coefficients, while they are insignificant in model (3). Thus, the negative effect on the rehiring

probability of departing prior to and during bankruptcy seems to apply primarily to incumbent

CEOs. Neither time variable is significant in the OLS regressions, indicating no systematic effect

of the timing of CEO departure on the loss of compensation.

The next set of variables captures characteristics of the CEO. The variables Age and Tenure

represent the CEO’s age and tenure, respectively, at departure. Chairman is a dummy variable

indicating that the CEO is Chairman of the board prior to departure. The variable Age enters

with a negative and significant coefficient in all three logit regressions for the probability of being

rehired. That is, older managers are less likely to find new employment after leaving their position

with the distressed firm, perhaps because older CEOs may chose to retire. At the same time, Age

is positively related to the income change of incumbent CEOs in model (5), and to the PV income

change in models (7) and (8). Since the opportunity cost for a departing CEO of not finding a

job after age 65 is virtually zero by our definition, older CEOs tend to lose less as they leave their

position.

There is some evidence that incumbent CEOs with longer tenure have trouble finding new

employment. More importantly, Tenure has a negative effect on the income change and the PV

income change. This may imply that CEOs with longer tenure are entrenched, 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 significantly negative in the regressions for income change and PV income change.

CEOs that are Chairman have more to lose after departure, largely reflecting the loss of the rents

component of their compensation.

The last set of variables describes the outcome of the Chapter 11 process. Prepack, Acquisition

and Liquidation take the value of one if the firm files a prepack, is acquired and is liquidated in

bankruptcy, respectively, and the CEO departs in the year of bankruptcy filing or later. That is,

we don’t expect the labor market to be forward looking in terms of rewarding or punishing CEOs

for a subsequent outcome. The variables Prepack and Acquisition are both insignificant in all

regression models. Liquidation enters with a marginally significant coefficient in models (1) and

22



(2). That is, the probability of being rehired is lower for managers whose firms are liquidated in

bankruptcy. Liquidation may result from either low going concern values or poor bargaining in

Chapter 11, both implying relatively low CEO quality.

To sum up, CEO personal costs of bankruptcy vary with the timing of departure and the CEO’s

age. The likelihood of finding new employment is lower for CEOs leaving prior to the resolution of

bankruptcy and for older CEOs. The income loss depends primarily on CEO characteristics such

as age, tenure and Chairman. Departing CEOs tend to suffer greater losses the younger they are,

the longer the tenure and if they are Chairman of the board.

Using models (1), (4) and (7), we generate predicted values for the likelihood of being rehired,

the change in annual income and the PV income change, respectively, for all CEO-years in our

sample. These predicted values provide ex-ante estimates of the expected personal bankruptcy

costs in terms of the rehiring probability and the compensation loss for each individual CEO at a

given point in time. In the analysis below, we will examine how these expected costs of bankruptcy

affects CEO turnover and the CEO’s compensation contract at the distressed firm.

4.2 Determinants of CEO turnover

We next examine the determinants of CEO turnover for financially distressed firms. Table 9 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

regressions include variables that capture the control rights of institutional shareholders, secured

creditors, bondholders and trade creditors. The sample is 1,565 firm-years with a full set of control

variables. The benchmark category is 1,245 firm-years without any CEO turnover. There are

162 cases of voluntary turnover and 158 cases of forced turnover. 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 model uses time period dummies, CEO characteristics, and firm

characteristics as explanatory variables. The second and third models include our measures for

expected personal bankruptcy costs derived above, eliminating the explanatory variables used to

construct these measures.

In this context, the variable Before (During) indicates that the firm-year observation is in

23



year -2 or -1 (0 to 1) relative to Chapter 11 filing. The base-line is firm-years associated with the

emergence and post-bankruptcy operations of the restructured firm. The positive coefficient for

During suggests that the likelihood of CEO turnover, voluntary and involuntary, is significantly

higher around Chapter 11 filing than after the firm has successfully emerged from bankruptcy.24

Turning to the variables that describe CEO characteristics, older CEOs are more likely to

leave voluntarily, perhaps because they chose to retire. Moreover, Tenure produces a significantly

positive coefficient in the forced turnover decision. That is, CEOs with a longer tenure at the

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

alternative specifications, not shown here, we instead enter a dummy variable indicating that the

CEO is incumbent. 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 that incumbent CEOs face a higher probability of turnover.

The variable, Chairman, enters with a negative and marginally significant coefficient in the

voluntary turnover decision, indicating that CEOs who are Chairman of the board are less inclined

to leave voluntarily. The regressions further include Ownpct, which measures the percent equity

in the bankrupt firm owned by the CEO. The likelihood of voluntary turnover decreases with the

CEO’s equity ownership. 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.

All models contain 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 in all

specifications. There is some evidence that the firm’s financial strength 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. The regressions also

control for industry distress (IndDistress, a dummy 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.25

24Note also that the coefficient for During is higher for forced turnover than for voluntary turnover (1.4 versus 0.5in model 1), the difference being significant at the 5% level.

25The definition of industry distress follows Acharya, Bharath, and Srinivasan (2007).

24



The remaining variables are intended to capture the influence of various stakeholder groups

on CEO turnover throughout the restructuring process. The variable Institution >= 25% is a

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

firm’s equity in a given year.26 As shown in Table 9, the probability of forced turnover decreases

with Institution >= 25%. That is, CEOs of firms with high institutional ownership are less likely

to be forced to leave than CEOs of 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.27 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.

DIP Financing is a dummy variable 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 prepetition loans (Skeel, 2003) to continuing prior lending

relationship (Li and Srinivasan, 2011).28 The variable DIP F inancing enters the regression for

forced turnover with a significant and positive coefficient. Thus, large prepetition lenders play a

major role in the firm’s governance through their DIP financing provisions by forcing the incumbent

CEO to leave.29

The next two variables capture the influence of holders of unsecured claims. The dummy vari-

ables Bond debt >= 70% of liabilities and Trade debt >= 70% of liabilities indicate that public

bonds and trade credits, respectively, account for more than 70% of the total liabilities. We find

evidence that firms with large trade credits are less likely to dismiss the CEO. As long as the

distressed firm continues to pay its trade credits, suppliers have few incentives to fire the CEO.

26This information is from 13-F filings. The 25% threshold is the sample average fraction of institutional ownershipin the fiscal year prior to Chapter 11 filing.

27Coelho, Taffler, and John (2010) document that institutional owners tend to sell out as the firm approachesbankruptcy. In Jiang, Li, and Wang (2012), 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.

28DIP 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.

29DIP Financing is also marginally significant in the CEO’s decision to leave voluntarily.

25



Instead, existing suppliers may prefer to maintain their business relationship with the CEO through-

out bankruptcy reorganization, hoping for a continued business relationship with the restructured

firm.30 This is consistent with Kolay and Lemmon (2011), who find that suppliers continue to

support their distressed customers by extending short-term credit in an attempt to avoid fixed

switching costs.31

Models (2) and (3) in Table 9 enter our estimates for expected CEO personal bankruptcy

costs. Importantly, the inclusion of expected bankruptcy costs does not change the inferences for

the other variables discussed above. Both models add the expected probability of being rehired.

To capture the ex ante expected loss in compensation, we enter the expected income change in

model (2) and the expected PV income change in model (3). The expected probability of being

rehired reduces the probability of voluntary and forced CEO turnover. This suggests that CEOs

with relatively good prospects of outside employment are more likely to stay with the distressed

firm. It is possible that these CEOs are of better quality compared to other CEOs in our sample.

As a result, the firm’s stakeholders may be more inclined to retain them or the CEOs themselves

may have better confidence to turn around the company and thus decide to stay. Turning to the

expected compensation loss, a smaller expected loss of income is associated with a higher likelihood

of voluntary departure and a lower probability of forced turnover. To the extent that the expected

compensation loss captures CEO quality, it is not surprising that higher quality CEOs are more

inclined to leave voluntarily and less likely to be fired. Our ex ante bankruptcy cost estimates and

the results they generate provide a rational explanation for the CEO turnover decision which has

not been documented in the prior literature.

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

the forced turnover is associated with control rights held by prepetition lenders through the 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 trade credits. The influence of lenders on the CEO

turnover decision shows the significance of the shift in control rights from shareholders to creditors

30An 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.

31See also Hertzel, Li, Officer, and Rodgers (2008) for evidence that bankruptcy filing tends to have a large negativevaluation impact on suppliers.

26



of the financially distressed firm. Our results also show that the ex ante expected personal costs of

bankruptcy help predict the decision of CEO turnover. In particular, a high ex ante probability of

being rehired is associated with lower voluntary and forced turnover. Moreover, a relatively low ex

ante expected income loss is associated with higher voluntary turnover and lower forced turnover.

These results produce new and unique insights into the determinants of the CEO’s decision to

voluntary leave a financially distressed firm and stakeholder incentives to fire the CEO.

4.3 Determinants of the CEO’s compensation package

Table 10 presents an OLS regression analysis of the determinants of the departed CEOs’ compensa-

tion package at the distressed firm. The dependent variable is the logarithm of total compensation

in models (1) to (3), while the dependent variable in models (4) to (6) is the proportion cash pay

(salary, bonus and LTIP) of the total compensation. The sample is 1,376 firm-years from three

years before filing to liquidation/acquisition or three years after emergence for the 342 sample firms.

As before, the regressions control for the year relative to Chapter 11 filing, CEO characteristics

(age, tenure, chairmanship, and equity ownership), firm characteristics (size, asset tangibility, prof-

itability, leverage, industry distress, and prepack) and industry fixed effects. In addition, we enter

three explanatory variables that indicate whether a new CEO is hired internally or externally, and

whether she is a restructuring specialist. All variables are defined in Appendix Table 1. Again, we

add our estimates of CEO expected bankruptcy costs in the second and third regression.

As shown in the table, the average CEO compensation is lower before and during Chapter 11

reorganization compared to after emerging from bankruptcy. A relatively high proportion of the

pay is in cash while the firm restructures in bankruptcy, probably because the firm’s equity trades

at depressed prices (if traded at all). The coefficient for Internal is significantly negative and the

one for External is significantly positive in the regression for total pay, 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 54% less and external replacements are paid 53% more than

27



staying CEOs.32 One reason for our higher estimates may be that we control for key CEO and firm

characteristics. The last three columns show that new CEOs, hired internally or externally, have a

larger proportion of their pay in stock and option grants. Since newly hired CEOs usually do not

have any wealth tied to the company’s performance, awarding grants is a way to achieve a desired

performance sensitivity. The variable Specialist enters with an insignificant coefficient, suggesting

that new CEOs who are turnaround specialists generally are paid at par with other externally hired

CEOs.

The relation between CEO and firm characteristics and compensation is largely consistent with

prior literature. For example, older CEOs and CEOs with a larger equity stake (ownpct)tend

to have lower total compensation and a relatively large fraction of their pay in cash .33 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. CEOs with higher stock ownership

may prefer cash compensation in order to diversify their wealth. In addition, we find firm size

and leverage to affect both the level and structure of pay. CEOs receive higher pay and a lower

fraction cash compensation the larger the firm and the lower the leverage, probably because equity

grants in financially distressed firms have less value. CEO total compensation further decreases

with T angibility, suggesting that firms with a high fraction intangible assets tend to pay their

CEOs more, and is lower for firms filing a prepack. The remaining variables are insignificant or

only marginally significant.

We next turn to the effect of the CEO’s expected personal bankruptcy costs on the total

amount and structure of the CEO’s compensation at the distressed firm. The ex ante measure for

the rehiring probability produces a positive and significant coefficient in model (2) and a negative

and significant coefficient in model (5). 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

32The regression coefficient show that internal CEOs are paid 0.774 less than incumbent CEOs in logarithm of totalpay while external hires are paid 0.425 more in logarithm of total paid. This translates into (1−e−0.774) ∗100 = 54%less pay for internal successions and (e0.425 − 1) ∗ 100 = 53% more pay for external replacements.

33The significance of the coefficient for ownpct disappears when entering expected bankruptcy costs in models (5)and (6).

28



to provide additional incentives to stay. The CEO’s expected income change and expected PV

income change largely produce insignificant coefficients. The exception is a positive and marginally

significant coefficient for the PV income change in model (6). There is some indication that CEOs

with relatively small 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. Note,

however, that the significance of the coefficient for the expected probability of rehiring disappears

when entering the PV income change.

Overall, our results indicate that the ex ante probability of rehiring and expected income change

help predict the design of CEO incentive contracts. In particular, a high ex ante rehiring probability

is associated with higher total compensation and a lower proportion cash pay. These results produce

new and unique insights into the determinants of the CEO’s compensation contract at financially

distressed firms.

5 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. As before, shares are

valued at the year-end market price and options are valued using the Black-Scholes model. 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 change 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

29



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.34

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 in the ownership

stake is primarily because new CEOs enter the sample with smaller equity stakes, if any.35 After

year 1, however, the median equity ownership slowly increases to 1% in year 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 CEO equity ownership percentage documented in Panel A, as well as a decline in

the firm’s stock price as it approaches bankruptcy. Limiting the sample to incumbent CEOs only

generates a dollar equity loss of a similar magnitude.

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.

6 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

34The number of cases is 141 in year 1, 99 in year 2, and 77 in year 3.35The median percent equity ownership for incumbent CEOs is relatively constant, suggesting that they typically

don’t sell out prior to bankruptcy.

30



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, more than one half of departing CEOs find a new job. Of

these, three-quarters 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. In contrast,

the CEOs who fail to find no new employment experience an income loss with a median present

value of $4.4 million (discounted until retirement age). Across the full sample of CEOs, the ex ante

expected median PV income change 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 PV income change of zero, while those

who find new full-time employment after being forced out suffer a 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.

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.

Finally, CEO equity losses are significant. Three years prior to the year of Chapter 11 filing,

the median value of the CEO’s equity holding is $12 million. This value drops to $2 million in year

-1, and to zero upon filing. it is unclear whether the drop in equity value prior to year -1 should

be counted as a “bankruptcy cost” as the CEO chose to keep the investment. However, the loss

of $2 million from year -1 is most likely unavoidable and therefore may be viewed as a bona fide

31



personal bankruptcy cost component.

32



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Figure 1Median 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. The first graph showsthe median dollar amount of total pay, while the second graph shows an index of the median total pay. Throughyear 0, the graphs plot the CEO pay for the total sample of 342 firms that filed for Chapter 11 during 1996-2007.After year 0, the plots are 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.

36



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 77 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 77 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

S a m p l e f r e q u e n c y

-30 -20 -10 0 10Change in total compensation ($ million)

0

. 1

. 2

. 3

. 4

. 5

S a m p l e f r e q u e n c y

-40 -30 -20 -10 0 10Change in total compensation ($ million)

37





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 Table 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 18

2003 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

39



Table 2CEO turnover by relative year and reason

Panel A shows CEO turnover and the average age and tenure of the departing CEOs by fiscal year relative tobankruptcy filing, where the year of filing is 0. Panel B shows CEO turnover by reason for turnover. The sample is342 large firms filing for US Chapter 11 in 1996-2007. The CEO data starts three years prior to filing and ends threeyears after emergence or when the firm is liquidated or acquired, and spans from year 1993 through 2010. Year 4+includes year 4 through the end of our sample. The information on the departing CEO is incomplete in 4 firms inyear -2. An incumbent CEO is in place at the end of year -3. All variables are defined in Appendix Table 1.

A: CEO turnover by year relative to Chapter 11 filing

Year % of incumbent Forcedrel. to No. of Total CEO turnover CEOs in place Departed CEOs departurefiling firms N % at year-end N Age Tenure N %

-3 338 - - 100 - - - - --2 342 66 19 82 62 56 6.1 19 31-1 342 87 25 60 87 55 5.9 43 490 342 100 29 44 100 54 5.0 56 561 342 114 33 29 114 55 5.7 62 542 247 76 31 20 76 56 6.8 47 623 137 29 21 18 29 58 5.2 10 344+ 144 13 9 - 13 54 7.5 7 54

Total 2,234 485 26 - 481 55 5.9 244 51

B: CEO turnover by reason for turnoverAll departed Forced Departures by

CEOs departure incumbent CEOsReason for CEO departure N % N % N %

Resigned for personal reasons 102 21 47 46 65 64Pursue other interest 56 12 26 46 29 52Pressured by the board, shareholders

and creditors 63 13 63 100 45 71Performance related 17 4 17 100 14 82Liquidation or acquisition 91 19 63 69 42 46Retirement or normal succession 72 15 0 0 58 81Death or illness 2 0 0 0 1 50Other reasons 28 6 0 0 7 25No reason given 50 10 28 56 29 58

Total 481 100 244 51 290 60

40



Table 3Characteristics of new CEOs hired by the sample firms

The sample is 348 new CEOs that are hired from two years before Chapter 11 filing to three years after emergence orliquidation/acquisition at 342 large US firms filing for Chapter 11 in 1996-2007. All variables are defined in AppendixTable 1. N is number of cases and % is the percent of all new CEOs.

A: Professional background of 348 new CEOs by hiring year relative to bankruptcy filing

All new All Turnaround Non-specialist OtherCEOs external specialist CEO external

N N % N % N % N %

Year relative to bankruptcy filing

-2 66 36 55 10 15 14 21 12 18

-1 87 47 54 13 15 24 28 11 130 100 59 59 28 28 25 25 9 91 50 34 68 11 22 14 28 10 202 26 16 62 5 19 10 38 1 43 15 9 60 2 13 6 40 1 74 4 1 25 0 0 0 0 1 25

All 348 202 58 69 20 93 27 45 13

B: Average characteristics of 202 new CEOs hired externally

All Turnaround Non-specialist Other

external specialist CEO external

Number of CEOs 202 64 93 45

CEO characteristics:

Age 52 54 53 50Length of previous employment (years) 5.4 6.5 4.8 5.2

Characteristics of the previous employer:

Public firm 0.40 0.31 0.39 0.56Same 2-digit industry as sample firm 0.27 0.19 0.31 0.29Sales (in $ million) 15,547 8,569 9,687 30,733Sales of old firm > sales of sample firm 0.53 0.36 0.43 0.83

Characteristics of contract with sample firm:

Employment contract offered 0.77 0.70 0.76 0.89Severance pay offered (in $ thousands) 1,477 1,590 1,475 1,321

41



T a

b l e 4

N e w

e m p

l o y m e n

t o

f d e p a r

t e d C E

O s

T h e t a b l e s h o w s C E O c h

a r a c t e r i s t i c s a c r o s s d i ff e r e n t t y p e s o f n e w e m p l o y m e n t ( P a n e l A ) , a n d t h e f r e q u e n c y o f n e w e m p l o y m e n t t y p e s b y y e a r o f d e p a r t u r e ( P a n e l

B ) , f o r c e d v s . v o l u n t a r y

d e p a r t u r e ( P a n e l C ) , a n d i n c u m b e n t

v s . n e w C E O s ( P a n e l D ) . P a n e l E s h o w s c h a r a c t e r i s t i c s o f t h e n e w fi r m s

w h e r e d e p a r t e d C E O s

a r e e m p l o y e d . T h e s a m p l e i s 4 8 1 C E O s t h a t l e a v e t h e i r p o s i t

i o n b e t w e e n y e a r - 2 ( w h e r e 0 i s t h e y

e a r o f fi l i n g ) a n d t h r e e y e a r s a f t e r e m

e r g e n c e o r t h e y e a r o f

l i q u i d a t i o n / a c q u i s i t i o n a

t 3 4 2 l a r g e fi r m s fi l i n g f o r U S C h a p t e r 1 1 i n 1 9 9 6 - 2 0 0 7 . A l l v a r i a b l e s a r e d e fi n e d i n A p p e n d i x T a b l e 1 . T h e p - v a l u

e i n P a n e l E i s f r o m a

W i l c o x o n t e s t o f t h e d i ff e r e n c e i n m e d i a n b e t w e e n o l d a n d n e w

fi r m s , l i m i t e d t o c a s e s w i t h d a t a o n b o t h fi r m s .

T y p e o f n e w j o b :

S t a y

R e t a i n

C E O a t

C E O a t

N o n - C

E O

N o n - C E O

C o n s u l t a n t

a s

h o n o r a r y

p u b l i c

p r i v a t e

e x e c u t i v e a t

e x e c u t i v e a t

o r

S e l f -

N o n e w

A l l

C h a i r m a n p

o s i t i o n

fi r m

fi r m

p u b l i c

fi r m

p r i v a t e fi r m

p o l i t i c i a n

e m

p l o y e d

e m p l o y m e n t

N u m b e r o f c a s e s

4 8 1

3 5

4 7

2 9

7 1

5 2

4 4

1 9

2 6

1 5 8

A : A v e r a g e c h a r a c t e r

i s t i c s o f t h e d e p a r t i n g C E O

A g e

5 5

5 7

5 6

5 4

5 3

5 3

5 3

5 8

5 7

5 7

T e n u r e

5 . 9

6 . 9

5 . 8

4 . 4

5 . 4

4 . 7

5 . 6

4 . 9

8 . 1

6 . 3

T i m e t o n e w j o b ( y e a r s )

1 . 0

0 . 0

0 . 0

1 . 3

1 . 4

1 . 2

1 . 2

1 . 1

1 . 3

-

B : P o s t - d e p a r t u r e e m

p l o y m e n t b y r e l a t i v e y e a r o f d e p

a r t u r e

Y e a r - 2 t o - 1

1 4 9

1 8

2 1

7

1 6

2 0

1 1

6

7

4 3

Y e a r 0 t o 1

2 1 4

1 2

2 1

1 5

3 2

1 7

2 1

6

1 4

7 6

Y e a r 2 t o e n d o f s a m p l e

1 1 8

5

5

7

2 3

1 5

1 2

7

5

3 9

C : P o s t - d e p a r t u r e e m

p l o y m e n t b y f o r c e d v s . v o l u n t a r

y d e p a r t u r e

F o r c e d

2 4 4

3

1 2

1 5

4 5

1 9

1 6

7

1 7

1 1 0

V o l u n t a r y

2 3 7

3 2

3 5

1 4

2 6

3 3

2 8

1 2

9

4 8

D : P o s t - d e p a r t u r e e m

p l o y m e n t b y i n c u m b e n t v s . n e w

C E O s

I n c u m b e n t C E O s

2 9 0

2 5

3 6

1 5

4 1

2 7

2 6

7

1 8

9 5

N e w l y h i r e d C E O s

1 9 1

1 0

1 1

1 4

3 0

2 5

1 8

1 2

8

6 3

E : I n d u s t r y a n d m e d

i a n s a l e s o f s a m p l e fi r m s v s . fi r m

s t h a t h i r e d e p a r t e d C E O s

P e r c e n t n e w fi r m s i n t h e

s a m e 2 - d i g i t

i n d u s t r y a s t h e s a m p l e fi r m

3 0

-

-

3 8

3 0

2 5

3 0

-

-

-

S a l e s o f s a m p l e fi r m s ( $

m i l l i o n )

1 , 0 6 6

-

-

1 , 0 0 3

8 5 1

1 , 7 5

5

8 6 2

-

-

-

S a l e s o f n e w fi r m s ( $ m i l l i o n )

6 1 6

-

-

6 2 3

1 1 5

2 , 2 6

0

2 7 0

-

-

-

p - v a l u e o f d i ff e r e n c e i n s a l e s

0 . 3 0 6

-

-

0 . 3 9 1

0 . 0 0 4

0 . 2 7

9

0 . 0 1 8

-

-

-

42



Table 5Severance paid to departing CEOs

The table shows the severance payment in $ thousands (constant 2009 dollars) by the year of CEO departure relativeto bankruptcy filing (Panel A), forced vs. voluntary turnover (Panel B), incumbent vs. new CEOs, and type of new employment (Panel D), respectively. The mean and median severance pay is conditional on receiving severance.Columns eight and ten show the severance payment in percent of the CEO’s annual salary. The sample is 481 CEOswho leave their position between two years before Chapter 11 filing and three years after emergence or the year of liquidation/acquisition at 342 large US firms filing for Chapter 11 in 1996-2007. All variables are defined in AppendixTable 1.

% CEOs Contractual Discretionalreceiving severance severance Total severance

N severance mean median mean median mean % median %

All 481 27 1,693 541 1,818 349 3,511 579 1,559 300

A: Severance paid by year of departure relative to bankruptcy filing

Year -2 to -1 149 32 1,146 311 950 391 2,096 366 1,526 339Year 0 to 1 214 29 1,778 597 2,539 449 4,317 699 1,517 279Year 2 and after 118 19 2,674 1,118 1,702 5 4,376 711 1,772 252

B: Severance paid by forced vs. voluntary turnover

Forced 244 32 1,907 673 2,177 384 4,084 654 1,688 339Voluntary 237 23 1,380 400 1,294 313 2,674 469 1,469 238

C: Severance paid by incumbent vs. new CEOs

Incumbent CEOs 290 29 1,773 503 2,360 520 4,132 650 1,862 339New CEOs 191 25 1,551 667 853 24 2,403 442 1,179 214

D: Severance paid by type of new employment

Stay as chairman 35 0 0 0 0 0 0 0 0 0Full-time employee at a new company 196 34 2,202 806 1,351 212 3,553 653 1,869 330Consultant/self-employed/honorary position 92 38 725 193 3,477 544 4,202 560 1,526 260No new employment 158 19 1,753 957 864 18 2,617 453 1,617 313

43



Table 6Methodology for estimating CEO compensation at new employment

The table describes the methodology used to estimate the departed CEO’s income at her new employment. Anindustry-size match is a firm in ExecuComp in the same two-digit SIC industry and closest in sales, assets oremployees, whichever is available for the new firm. If none of the size variables is available, we use the industrymedian firm in sales.

Type of new employment Methodology for estimating CEO income

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 total pay following Gao, Lemmon, and Li (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 private

firms pay with a 12% cut in cash pay and 30% cut in total pay following Gao,Lemmon, and Li (2011). This is an average of the coefficients in their Table 6.For two junior managers in the sample, we take 50% of the level of pay to seniorexecutives 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 Zero income.

Retain CEO job This category includes incumbent CEOs and new CEOs hired prior to the resolu-tion of the bankruptcy case, and who remain CEO of the restructured firm threeyears after emergence from bankruptcy. The pay at the ”new position” is fromthe last fiscal year with available compensation data. We drop cases where thelast year with available data is the year of hiring.

44



Table 7CEO total compensation change and present value of income loss

The table shows estimates of the change in CEO total compensation in $ thousands and percent, split by reason forturnover (Panel A), type of new employment (Panel B), relative year of departure (Panel C), CEO age (Panel D),CEO tenure (Panel E), incumbent vs. new CEOs (Panel F), and Chapter 11 outcome (Panel G). Income change is

the difference in annual total compensation at the ”new” firm (see Table 6) and the ”old” firm (in year -3 or the firstavailable 10-K filing or proxy statement for incumbent CEOs and the year of hiring for new CEOs). PV income changeis the present value of the income change discounted at a 10% rate until age 65, adjusted for severance and the timeto new employment. ”mult.” is the ratio of PV income change and the CEO’s annual total pay prior to departure.The sample is 92 CEOs that remain three years after emergence and 421 CEOs that leave their position in year -2or later, at 342 large firms filing for US Chapter 11 bankruptcy in 1996-2007. We drop cases where the pre-turnovertotal pay is missing or zero, and cases in the top five percentile in percentage change of total compensation.

Income change PV income changeMean Median Mean Median

N $ % $ % $ mult. $ mult.

All 513 -2,662 -21 -639 -80 -15,924 -0.6 -2,660 -2.7

A: Income change by reason for departure

No turnover 92 -1,659 46 2 1 -9,897 3.0 0 0.0Voluntary 196 -1,921 -23 -655 -85 -8,073 -0.1 -2,194 -1.7Forced 225 -3,718 -47 -933 -100 -25,231 -2.6 -5,006 -4.9

B: Income change by type of subsequent employment

Retain CEO position or chairmanship 122 -1,919 46 -20 -4 -10,807 3.0 0 0.0Full-time employee at a new company 162 -1,991 26 -337 -34 -14,330 1.6 -2,378 -1.7Consultant/self-employed/honorary 81 -3,198 -72 -1,035 -100 -17,268 -3.1 -3,934 -3.8No new employment 148 -3,716 -100 -1,108 -100 -21,116 -4.6 -4,378 -4.9

C: Income change by CEO departure year relative to Chapter 11 filing

Year -2 to -1 161 -1,947 -22 -598 -75 -9,857 -0.7 -2,307 -2.5Year 0 to 1 202 -3,275 -28 -698 -93 -19,635 -0.9 -3,168 -3.2Year 2 and after 150 -1,469 -12 -520 -66 -13,296 -0.2 -2,078 -1.7

D: Income change by CEO age at departure

Less than 50 years old 142 -2,968 8.9 -628 -70 -26,262 0.8 -5,006 -6.051-60 years old 250 -2,636 -27 -630 -79 -14,809 -1.4 -3,248 -3.8More than 60 years old 112 -2,496 -47 -762 -100 -5,368 -0.8 -211 -0.2

E: Income change by CEO tenure at departure

Less than 3 year 162 -2,045 -16 -534 -82 -13,691 -0.7 -2,654 -3.24-6 year 170 -2,605 -11 -628 -72 -16,267 -0.1 -2,933 -3.2More than 6 years 177 -3,333 -35 -828 -89 -17,871 -1.1 -2,588 -2.2

F: Income change by incumbent vs. new CEOs

Incumbent CEOs 314 -2,993 -31 -700 -88 -16,973 -1.1 -2,677 -2.7New CEOs 199 -2,140 -5 -510 -72 -14,268 0.2 -2,601 -3.0

G: Income change by Chapter 11 outcome

Emergence 346 -2,619 -10 -623 -72 -14,942 0.2 -2,464 -2.1Acquisition 55 -2,288 -42 -638 -90 -9,866 -1.5 -2,870 -3.7Liquidation 112 -2,981 -46 -664 -97 -21,932 -2.8 -3,598 -4.7

45



T a

b l e 8

R e g r e s s i o n s f o r

t h e p r o

b a

b i l i t y t h a

t t h e d

e p a r

t e d C E O

i s r e

h i r e

d a n d

t h e c

h a n g e

i n C E O

t o t a l c o m p e n s a

t i o n

T h e t a b l e s h o w s c o e ffi c i e n t e s t i m a t e s f r o m l o g i t r e g r e s s i o n s f o

r t h e p r o b a b i l i t y t h a t t h e d e p a r t e d C

E O i s r e h i r e d ( m o d e l s 1 - 3 ) a n d f r o m

o r d i n a r y l e a s t s q u a r e s

( O L S ) r e g r e s s i o n s o f t h e

i n c o m e c h a n g e ( m o d e l s 4 - 6 ) a n d P V i n c o m e c h a n g e ( m o d e l s 7 - 9 ) . T h e d e p a

r t e d C E O i s r e h i r e d i f s h e s t a y s a s C h

a i r m a n o r b e c o m e s a n

e x e c u t i v e a t a n o t h e r fi r m

. I n c o m e c h a n g e i s t h e d i ff e r e n c e i n a n n u a l t o t a l c o m p e n s a t i o n a t t h e ” n e w ” fi r m ( s e e T a b l e 6 ) a n d t h e ” o l d ” fi r m

( i n y e a r - 3 o r t h e fi r s t

a v a i l a b l e 1 0 - K fi l i n g o r p

r o x y s t a t e m e n t f o r i n c u m b e n t C E O s a

n d t h e y e a r o f h i r i n g f o r n e w C E O s ) .

P V i n c o m e c h a n g e i s t h e p r e s e n t v a l u e o f t h e i n c o m e c h a n g e

d i s c o u n t e d a t a 1 0 % r a t e u n t i l a g e 6 5 , a d j u s t e d f o r s e v e r a n c e a n d t h e t i m e t o n e w e m p l o y m e n t . T h e

s a m p l e i s 4 4 8 C E O s l e a v i n g h e r p o s i t i o n b e t w e e n t w o y e a r s

b e f o r e fi l i n g a n d t h r e e y e

a r s a f t e r e m e r g e n c e o r t h e y e a r o f l i q u

i d a t i o n / a c q u i s i t i o n f o r 3 4 2 l a r g e fi r m s

fi l i n g f o r U S C h a p t e r 1 1 b a n k r u p t c y i n 1 9 9 6 - 2 0 0 7 . S t a n d a r d

e r r o r s a r e i n b r a c k e t s . ∗ ∗ ∗

, ∗ ∗

, a n d ∗

d e n o t e s s i g n i fi c a n c e a t t h e 1 % , 5 % a n d 1 0 % l e v e l , r e s p e c t i v e l y .

A l l v a r i a b l e s a r e d e fi n e d i n A p p e n d i x

T a b l e 1 .

( 1 )

( 2 )

( 3 )

( 4 )

( 5 )

( 6 )

( 7 )

( 8 )

( 9 )

C E O i s r e h i r e d

I n c o m e c h a n g e

P V o f i n c o m e c h a n g e

A l l

I n c u m b e n t

N e w

A l l

I n c u m b e n t

N e w

A l l

I n

c u m b e n t

N e w

I n t e r c e p t

2 . 9 0 3 ∗ ∗ ∗

2 . 5 5 8 ∗ ∗ ∗

4 . 2 2 8 ∗ ∗ ∗

- 5 . 8 6 9 ∗ ∗

- 8 . 2 9 4 ∗ ∗

1 . 4 3 6

- 8 4 . 4 1 3 ∗ ∗ ∗

- 1 0 1 . 6 6 8 ∗ ∗ ∗

- 3 2 . 6 4 9

[ 0 . 7 5 2 ]

[ 0 . 9 5 9 ]

[ 1 . 4 8 1 ]

[ 2 . 7 4 8 ]

[ 3 . 3 3 8 ]

[ 5 . 5 1 0 ]

[ 1 8 . 3 2 8 ]

[ 2 2 . 7 4 0 ]

[ 3 6 . 1 0 9 ]

R e l a t i v e y e a r s :

B e f o r e ( y r - 2 , - 1 )

- 0 . 5 5 8 ∗

- 0 . 8 8 2 ∗ ∗

- 0 . 6 2 2

- 0 . 0 8 5

- 1 . 0 5 9

- 1 . 0 3 4

0 . 3 8 5

- 5 . 7 6 6

- 6 . 6 4 3

[ 0 . 2 8 5 ]

[ 0 . 4 2 3 ]

[ 0 . 6 7 1 ]

[ 1 . 0 4 7 ]

[ 1 . 4 3 4 ]

[ 2 . 5 9 3 ]

[ 7 . 0 1 6 ]

[ 9 . 8 9 2 ]

[ 1 7 . 4 4 9 ]

D u r i n g ( y r 0 , + 1 )

- 0 . 5 2 0 ∗ ∗

- 0 . 9 2 3 ∗ ∗

- 0 . 2 5 4

- 1 . 2 7 1

- 2 . 3 9 3 ∗

- 0 . 8 8 5

- 4 . 9 7 3

- 1 3 . 3 8 5

- 1 . 5 1 3

[ 0 . 2 5 1 ]

[ 0 . 3 8 4 ]

[ 0 . 4 0 5 ]

[ 0 . 9 1 6 ]

[ 1 . 2 8 0 ]

[ 1 . 5 8 3 ]

[ 6 . 1 9 9 ]

[ 8 . 7 9 3 ]

[ 1 0 . 3 7 3 ]

C E O

c h a r a c t e r i s t i c s :

A g e

- 0 . 0 4 4 ∗ ∗ ∗

- 0 . 0 2 9 ∗

- 0 . 0 8 3 ∗ ∗ ∗

0 . 0 9 3 ∗

0 . 1 5 7 ∗ ∗ ∗

- 0 . 0 1 3

1 . 4 2 7 ∗ ∗ ∗

1

. 8 9 2 ∗ ∗ ∗

0 . 5 7 2

[ 0 . 0 1 3 ]

[ 0 . 0 1 6 ]

[ 0 . 0 2 5 ]

[ 0 . 0 4 8 ]

[ 0 . 0 5 6 ]

[ 0 . 0 9 0 ]

[ 0 . 3 1 7 ]

[ 0 . 3 7 5 ]

[ 0 . 5 8 9 ]

T e n u r e

- 0 . 0 3 9

- 0 . 0 5 5 ∗

0 . 1 1 1

- 0 . 1 8 4 ∗ ∗

- 0 . 2 3 7 ∗ ∗

- 0 . 7 1 2

- 0 . 9 9 4 ∗

- 1 . 3 0 7 ∗

- 3 . 7 7 3

[ 0 . 0 2 4 ]

[ 0 . 0 3 1 ]

[ 0 . 1 6 6 ]

[ 0 . 0 8 4 ]

[ 0 . 1 0 1 ]

[ 0 . 6 5 0 ]

[ 0 . 5 6 2 ]

[ 0 . 6 8 2 ]

[ 4 . 2 6 1 ]

C h a i r m a n

0 . 2 2 5

0 . 1 0 3

0 . 5 6 9

- 1 . 5 8 2 ∗ ∗

- 1 . 4 4 7

- 1 . 2 9 7

- 1 0 . 2 0 6 ∗ ∗

- 9 . 8 3 9

- 6 . 7 9 5

[ 0 . 2 0 8 ]

[ 0 . 2 6 5 ]

[ 0 . 3 6 5 ]

[ 0 . 7 7 1 ]

[ 0 . 9 2 8 ]

[ 1 . 3 8 8 ]

[ 5 . 1 3 1 ]

[ 6 . 2 8 0 ]

[ 9 . 1 0 0 ]

B a n k r u p t c y o u t c o m e :

P r e p a c k

0 . 2 5 2

0 . 2 9 4

0 . 2 1 0

1 . 0 1 9

1 . 3 8 8

0 . 0 4 6

6 . 7 3 2

5 . 9 4 1

6 . 5 6 6

[ 0 . 2 2 7 ]

[ 0 . 2 8 4 ]

[ 0 . 3 9 0 ]

[ 0 . 8 3 8 ]

[ 1 . 0 0 2 ]

[ 1 . 5 1 3 ]

[ 5 . 5 8 7 ]

[ 6 . 7 7 2 ]

[ 9 . 9 6 3 ]

L i q u i d a t i o n

- 0 . 5 5 2 ∗

- 0 . 7 3 9 ∗

- 0 . 6 0 7

0 . 3 6 8

1 . 4 5 1

- 1 . 6 3 4

- 2 . 9 0 4

2 . 8 3 8

- 1 3 . 4 0 2

[ 0 . 2 8 6 ]

[ 0 . 3 9 7 ]

[ 0 . 4 7 1 ]

[ 1 . 0 5 1 ]

[ 1 . 3 1 3 ]

[ 1 . 8 9 5 ]

[ 6 . 9 9 3 ]

[ 8 . 9 0 4 ]

[ 1 2 . 4 2 6 ]

A c q u i s i t i o n

- 0 . 0 9 4

0 . 1 2 4

- 0 . 4 6 9

0 . 2 8 2

- 3 . 1 1 8

2 . 3 1 4

6 . 8 2 4

- 1 1 . 9 7 2

1 6 . 3 6 6

[ 0 . 3 7 6 ]

[ 0 . 5 8 1 ]

[ 0 . 5 3 9 ]

[ 1 . 3 8 0 ]

[ 2 . 0 3 1 ]

[ 2 . 0 4 5 ]

[ 9 . 2 5 8 ]

[ 1 4 . 1 1 6 ]

[ 1 3 . 4 0 6 ]

N

4 4 8

2 8 1

1 6 7

4 1 0

2 6 1

1 4 9

4 0 6

2 5 8

1 4 8

P s e u d o R 2

/ A d j u s t e d R

2

0 . 0 4 2

0 . 0 4 3

0 . 0 6 4

0 . 0 2 2

0 . 0 6 4

- 0 . 0 1 1

0 . 0 5 0

0 . 0 9 2

0 . 0 0 3

46



Table 9Determinants of 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 1,565 firm-yearsfrom three years before filing to three years after emergence or the year of liquidation for 342 large firms filing for

US Chapter 11 bankruptcy in 1996-2007. There are 1,245 observations for no turnover, 162 voluntary turnover, and158 forced turnover. The expected probability of being rehired, the expected income change, and the expected PVof income change are the predicted values, respectively, from regressions (1), (4), and (7) in Table 8. All regressionscontrol for industry fixed effects at the 2-digit SIC code level. Standard errors are in brackets. ∗∗∗, ∗∗, and ∗ denotessignificance at the 1%, 5% and 10% level, respectively. All variables are defined in Appendix Table 1.

(1) (2) (3)Voluntary Forced Voluntary Forced Voluntary Forced

Intercept -29.614∗∗∗ -2.004 -24.339∗∗∗ -1.040 -24.896∗∗∗ -0.529[1.557] [1.875] [1.410] [1.821] [1.413] [1.782]

CEO expected bankruptcy costs:

Expected probability of being rehired -4.232∗∗∗ -1.924∗∗ -2.834∗∗∗ -2.808∗∗∗

[0.854] [0.881] [0.887] [0.902]Expected income change 0.217∗∗∗ -0.197∗∗∗

[0.067] [0.068]Expected PV of income change 0.031∗∗∗ -0.019∗∗

[0.008] [0.008]Year relative to filing:

Before (yr -2,-1) 0.375 0.410[0.253] [0.316]

During (yr 0,+1) 0.536∗∗ 1.424∗∗∗

[0.264] [0.300]CEO characteristics:

Age 0.068∗∗∗ -0.004[0.013] [0.013]

Tenure 0.005 0.057∗∗

[0.024] [0.024]

Chairman -0.390

∗

-0.278[0.203] [0.215]Ownpct -0.038∗∗∗ -0.006 -0.039∗∗∗ -0.012 -0.039∗∗∗ -0.011

[0.014] [0.009] [0.013] [0.009] [0.013] [0.009]Firm characteristics:

Size 0.087 0.029 0.097 0.047 0.091 0.058[0.079] [0.074] [0.077] [0.070] [0.077] [0.070]

Tangibility 0.157 -0.342 0.196 -0.226 0.171 -0.204[0.562] [0.577] [0.562] [0.566] [0.561] [0.566]

ROA -1.321 -1.765∗∗ -1.345 -2.322∗∗∗ -1.463∗ -2.361∗∗∗

[0.844] [0.757] [0.835] [0.734] [0.841] [0.734]Leverage -0.003 0.286 0.093 0.434∗∗ 0.058 0.449∗∗

[0.238] [0.205] [0.227] [0.192] [0.229] [0.191]IndDistress 0.090 0.155 0.059 0.148 0.078 0.139

[0.285] [0.322] [0.286] [0.316] [0.286] [0.316]Prepack 0.422∗∗ -0.037[0.222] [0.222]

Institution >= 25% 0.027 -0.555∗∗ -0.030 -0.685∗∗∗ -0.027 -0.682∗∗∗

[0.198] [0.215] [0.194] [0.211] [0.195] [0.210]DIP Financing 0.417∗ 0.532∗∗ 0.379∗ 0.471∗∗ 0.381∗ 0.497∗∗

[0.213] [0.222] [0.210] [0.222] [0.211] [0.221]Bond debt >= 70% of liabilities 0.355 -0.476 0.369 -0.462 0.382 -0.448

[0.309] [0.332] [0.305] [0.331] [0.306] [0.309]Trade debt >= 70% of liabilities -0.254 -0.452∗ -0.221 -0.486∗∗ -0.280 -0.457∗

[0.213] [0.221] [0.209] [0.221] [0.210] [0.220]

Pseudo R2 0.128 0.112 0.11247



Table 10Determinants of the CEO’s compensation package

The table shows the coefficient estimates from ordinary least squares (OLS) regressions for the logarithm of CEOtotal compensation at the sample firm (models 1-3) and for the proportion cash of the total compensation (models4-6). The sample is 1,376 firm-years from year -3 to 3 years after emergence or the year of liquidation for 342 large

firms filing for US Chapter 11 bankruptcy in 1996-2007. The CEO expected bankruptcy costs are the predictedvalues, respectively, from regression (1), (4), and (7) in Table 8. All regressions control for industry fixed effects atthe 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 Table 1.

CEO total compensation Prop ortion cash pay(1) (2) (3) (4) (5) (6)

Intercept 7.544∗∗∗ 5.783∗∗∗ 5.778∗∗∗ 0.680∗∗∗ 0.877∗∗∗ 0.863∗∗∗

[1.105] [1.122] [1.119] [0.250] [0.253] [0.252]

CEO expected bankruptcy costs:

Expected probability of being rehired 0.895∗∗ 0.849∗ -0.219∗∗ -0.152[0.407] [0.436] [0.092] [0.098]

Expected income change 0.002 0.005[0.030] [0.007]

Expected PV of income change -0.001 0.001∗

[0.004] [0.001]Relative years:

Before (yr -2,-1) -0.378∗∗∗ -0.035[0.123] [0.028]

During (yr 0, +1) -0.537∗∗∗ 0.074∗∗

[0.141] [0.032]CEO characteristics:

Internal -0.774∗∗∗ -0.693∗∗∗ -0.691∗∗∗ -0.079∗∗∗ -0.074∗∗∗ -0.075∗∗

[0.149] [0.144] [0.144] [0.034] [0.032] [0.032]External 0.425∗∗ 0.419∗∗ 0.419∗∗ -0.109∗∗∗ -0.105∗∗ -0.106∗∗

[0.183] [0.186] [0.186] [0.042] [0.042] [0.42]

Specialist 0.237 0.169 0.166 0.014 0.032 0.033[0.239] [0.242] [0.242] [0.054] [0.055] [0.054]

Age -0.021∗∗∗ 0.003∗∗

[0.006] [0.001]Tenure -0.017 -0.001

[0.011] [0.002]Chairman 0.007 -0.036∗

[0.093] [0.021]Ownpct -0.020∗∗∗ -0.022∗∗∗ -0.022∗∗∗ 0.003∗∗∗ 0.001 0.001

[0.004] [0.004] [0.004] [0.001] [0.001] [0.001]Firm characteristics:

Size 0.233∗∗∗ 0.237∗∗∗ 0.237∗∗∗ -0.019∗∗∗ -0.019∗∗∗ -0.019∗∗∗

[0.031] [0.031] [0.031] [0.007] [0.007] [0.007]ROA 0.716∗ 0.719∗ 0.724∗ -0.108 -0.155∗ -0.156∗

[0.387] [0.385] [0.385] [0.088] [0.087] [0.087]Leverage -0.210∗∗ -0.269∗∗∗ -0.268∗∗∗ 0.072∗∗∗ 0.109∗∗∗ 0.107∗∗∗

[0.104] [0.101] [0.101] [0.024] [0.023] [0.023]Tangibility -0.469∗ -0.588∗∗ -0.589∗∗ 0.022 0.028 0.029

[0.250] [0.254] [0.254] [0.057] [0.057] [0.057]IndDistress -0.090 -0.079 -0.079 0.019 0.010 0.011

[0.134] [0.136] [0.136] [0.030] [0.031] [0.031]Prepack -0.382∗∗∗ 0.039∗

[0.096] [0.022]

Adjusted R2 0.167 0.141 0.141 0.126 0.112 0.114

48



Appendix Table 1: Variable definitions, sources, and mean and median va

This table presents definition and source for all variables used in the study. The sample is 342 large US public firmresolved by the end of 2010. The mean and median values are from the last fiscal year before Chapter 11 filing and unbounded variables are winsorized at the 1% and 99% level. The table uses ”BRD” for Bankruptcy Research DatabBankruptcy plans are obtained from BD, 8Ks, and various US Bankruptcy Courts. The 10Ks, 8Ks, and proxy statemeThompson Reuters Ownership Database. The mean and median values for Panels C and D are based on all departerespectively.

Variable name Variable definition Source

A. Firm and Chapter 11 Characteristics

Assets Book value of total assets (in $ millions). BRD, BD, Comp

Sales Total sales (in $ millions). BRD, BD, Comp

Size Logarithm of total sales (in $ millions). BRD, BD, Comp

ROA Ratio of EBITDA to book value of total assets. Compustat, 10Ks

Leverage Ratio of total liabilities to book value of total assets. Compustat, 10Ks

Tangibility Ratio of net PP&E to book value of total assets. Compustat, 10Ks

Institution (%) Percent shares owned by institutional investors. 13Fs

Bank loan/liabilities Ratio of the face value of bank loans to total liabilities. Bankruptcy Pla

CapIQBond debt/liabilities Ratio of the face value of bonds outstanding to total liabilities. Bankruptcy PlCapIQ

Trade debt/liabilities Ratio of total liabilities less bank loans and bonds to total liabilities. Bankruptcy PlCapIQ

DIP Financing Indicator variable taking the value of one if debtor-in-possession (DIP)financing is obtained from prepetition lenders.

BRD, BD, Bankrtiva, LexisNexis

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

Prepack Indicator variable taking the value of one if the bankruptcy is prepack-aged or pre-negotiated.

BRD, BD, Bankr

Emergence Indicator variable taking the value of one if the firm subsequentlyemerges from bankruptcy.

BRD, BD, Bankr

Acquisition Indicator variable taking the value of one if the firm is acquired inbankruptcy.

BRD, BD, Bankr

4 9



Appendix Table 1 continued from previous page


Liquidation Indicator variable taking the value of one if the firm is liquidated orconverted into Chapter 7 in bankruptcy.

BRD, BD, Bankr

Duration Number of months in bankruptcy, from the date of filing to the date of plan confirmation.

BRD, BD, Bankr

B. CEO Characteristics

Tenure CEO tenure with the firm in years. Execucomp, 10Kments

Age CEO age in years. Execucomp, 10Kments

Chairman Indicator variable taking the value of one if the CEO is chairman of theboard.

Execucomp, 10Kments

Turnover Indicator variable taking the value of one if the CEO with the firm isterminated.

Execucomp, 10Kments, BD, Factiv

Ownpct Percent of common shares owned by the CEO. Execucomp, 10Kments

ValEquity Total value of shares and unexercised (unexercisable and exercisable)

options (in $ millions), following Core and Guay (1999).

Execucomp, 10K

ments, CRSP

Salary CEO salary (in $ thousands). Execucomp, 10Kments

Bonus Cash bonus plus non-equity long-term incentives (in $ thousands). Execucomp, 10Kments

Grants Total value of restricted stock granted and new stock options (Black-Scholes value) granted (in $ thousands).

Execucomp, 10Kments

SalaryBonus Salary and bonus (in $ thousands). Execucomp, 10Kments

Totalpay Sum of salary, bonus and grants (in $ thousands). Execucomp, 10Kments

CashPay Ratio of salary and bonus to Totalpay. Execucomp, 10K

ments

C. Departed CEOs

5 0



Appendix Table 1 continued from previous page


Turnover reasons Reasons of turnover include (1) resigned for personal reasons, (2) pursueother interest, (3) pressured by board, shareholders, or creditors, (4)performance related, (5) liquidation or acquisition, (6) retirement ornormal succession, (7) death or illness, (8) other reasons, (9) no reason

given.

10Ks, Proxy State

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)but the CEO is not employed by another company as a CEO immedi-ately after turnover; the turnover reason is (5) and the incumbent CEOdeparts prior to age 60.

10Ks, Proxy Stat

Severance Indicator variable taking the value of one if separation pay if providedto the departing CEO.

10Ks, Proxy Stat

Contractual severance Separation pay based on contract (in $ thousands), conditional on re-ceiving severance.

10Ks, Proxy Stat

Discretional severance Discretional separation pay including lump-sum cash pay, loan forgive-ness, adjustment to pension benefits, consulting contract, and equityincentives, conditional on receiving severance.

10Ks, Proxy Stat

Post-departure careers The employment types of departed CEOs, including (1) stay as chair-

man, (2) retaining honorary position, (3) CEO at a public company, (4)CEO at a private company, (5) non-CEO executive (e.g. CFO, COO,VP, director, senior manager etc.) at a public company, (6) non-CEO ex-ecutive (e.g. CFO, COO, VP, director, senior manager etc.) at a privatecompany, (7) consultant or politician, (8) self-employed, (9) no new em-ployment (e.g. retired, death, studying, in prison, under investigation,not found anywhere etc.).

10Ks, Proxy Sta

S&P Register of rectors and ExeWho’s Who in Fness, Forbes, BLinkedIn.

D. Newly Hired CEOs

External Indicator variable taking the value of one if the new CEO is hired fromoutside the firm.

10Ks, Proxy Stat

Sp ecialist Indicator variable taking the value of one if a the new CEO is aturnaround specialist.

10Ks, Proxy Stat

5 1



A p p e n

d i x T a

b l e 2

C E O

c o m p e n s a

t i o n c

h a n g e

b y

t y p e o

f n e w

e m p

l o y m e n

t

T h e t a b l e s h o w s C E O s a l a r y a n d b o n u s ( P a n e l A ) a n d t o t a l p

a y ( P a n e l B ) i n 2 0 0 9 U S d o l l a r s a c r o s s d i ff e r e n t n e w e m p l o y m e n t c a t e g o r i e s . T h e i n c o m e c h a n g e

i s t h e d i ff e r e n c e i n p a y a t t h e n e w fi r m a n d t h e o l d fi r m , m e

a s u r e d i n y e a r - 3 o r , i f n o t a v a i l a b l e ,

t h e fi r s t fi s c a l y e a r w h e n C E O a p p e a r s i n t h e s a m p l e . P V

i n c o m e l o s s f o r s a l a r y a n

d b o n u s m e a s u r e s t h e p r e s e n t v a l u e o f i n c o m e c h a n g e a s s u m i n g t h a t t h e C

E O w i l l r e c e i v e t h e n e w l e v e l o f s a l a r y a n d b o n u s u n t i l a g e

6 5 , d i s c o u n t e d a t a 1 0 %

r a t e a n d a d j u s t e d f o r n u m b e r o f y e a r s i t t a k e s t h e C E O t o fi n d n e w e m p l o y m e n t . P V i n c o m e l o s s f o r t o t a l p a y

m e a s u r e s t h e p r e s e n t

v a l u e o f i n c o m e c h a n g e a

s s u m i n g t h a t t h e C E O w i l l r e c e i v e t h e n e w l e v e l o f t o t a l p a y u n t i l a g e 6 5 , d

i s c o u n t e d a t a 1 0 % r a t e a n d a d j u s t e d

f o r n u m b e r o f y e a r s i t

t a k e s t h e C E O t o fi n d n

e w e m p l o y m e n t , p l u s a n y s e v e r a n c e r e c e i v e d a t d e p a r t u r e . W e r e p o r t b o t h

d o l l a r a m o u n t a n d m u l t i p l e o f C E O p a y p r i o r t o d e p a r t u r e

f o r P V i n c o m e l o s s . T h e s a m p l e i s 9 2 C E O s i n p l a c e u p t o t h

r e e y e a r s a f t e r e m e r g e n c e a n d 4 2 1 C E O s t h a t l e f t t h e i r p o s i t i o n b e t w e e n y

e a r - 2 a n d t h r e e y e a r s

a f t e r e m e r g e n c e a t 3 4 2 l a r g e fi r m s fi l i n g f o r U S C h a p t e r 1 1 b a

n k r u p t c y i n 1 9 9 6 - 2 0 0 7 . W e d r o p o b s e r v a t i o n s w h e r e t h e p r e - t u r n o v e r t o t a l

p a y i s m i s s i n g o r z e r o

a n d o b s e r v a t i o n s t h a t l i e i n t h e t o p fi v e p e r c e n t i l e i n p e r c e n t a g e c h a n g e o f t o t a l c o m p e n s a t i o n ( i . e . a b o v e 5 0 0 % ) t o e l i m i n a t e o u t l i e r s . T h e p - v a l u e s h o w s t h e

s i g n i fi c a n c e o f t h e m e a n / m e d i a n p e r c e n t a g e c h a n g e i n i n c o m e

c h a n g e b e i n g d i ff e r e n t f r o m z e r o .

P a y a t o l d

P a y a t n e w

I n c o m e c

h a n g e

P V

i n c o m e l o s s

fi r m i n $

fi r m i n $

M e a n

M e d i a n

M e a n

M e d i a n

N

m e a n

m e d i a n

m e a

n

m e d i a n

$

%

p - v a l u e

$

%

p - v a l u e

$

m u l t

i p l e

$

m u l t i p l e

A : C E O

s a l a r y a n d b

o n u s ( i n $ t h o u s a n d s )

R e t a i n C E O a t o l d fi r m

9 2

1 , 3 0 1

7 3 3

1 , 2 6

0

8 8 6

- 4 1

5 8

0 . 0 0

6 9

8

0 . 0 0

- 6 5 1

3 . 3

9 7

0 . 2

T y p e o f n e w e m p l o y m e n t :

S t a y a s c h a i r m a n

3 0

8 0 9

8 0 5

8 2

9

6 6 1

1 9

3 1

0 . 2 7

- 1 2 7

- 2 9

0 . 6 2

7 3 7

2 . 8

0

0 . 0

R e t a i n h o n o r a r y p o s i t i o n

4 5

8 7 8

5 8 4

0

0

- 8 7 8

- 1 0 0

0 . 0 0

- 5 8 4

- 1 0 0

0 . 0 0

- 4 , 3 1 0

- 5 . 0

- 3 , 0 1 9

- 4 . 9

C E O a t a p u b . c o .

1 9

1 , 3 6 8

8 4 2

1 , 0 2

7

6 6 6

- 3 4 0

1 8

0 . 5 6

- 1 7 3

- 2 0

0 . 5 2

- 5 , 0 9 8

0 . 1

- 2 , 2 7 3

- 2 . 5

C E O a t a p v . c o .

5 8

1 , 5 8 3

9 1 1

7 8

3

5 3 5

- 7 9 9

3 1

0 . 3 0

- 2 5 2

- 3 5

0 . 0 9

- 6 , 2 6 8

3 . 4

- 2 , 0 9 3

- 2 . 6

N o n - C E O e x e c u t i v e a t a

p u b . c o .

4 5

9 1 6

7 8 8

7 1

4

5 9 9

- 2 0 1

0

0 . 9 8

- 8 1

- 9

0 . 7 7

- 1 , 8 6 9

- 0 . 8

- 1 , 1 6 3

- 1 . 1


p v . c o .

4 0

1 , 3 1 4

8 4 4

7 6

3

3 1 8

- 5 5 1

- 9

0 . 7 3

- 3 2 1

- 4 8

0 . 0 0

- 4 , 5 4 4

- 0 . 8

- 2 , 2 7 2

- 3 . 2

C o n s u l t a n t o r p o l i t i c i a n

1 6

1 , 2 3 6

7 7 9

3 4

6

3 4 4

- 8 9 0

- 3 7

0 . 0 3

- 4 4 3

- 5 6

0 . 0 4

- 4 , 9 7 7

- 2 . 2

- 2 , 2 0 7

- 3 . 3

S e l f - e m p l o y e d

2 0

1 , 1 0 1

7 6 1

3 8

4

3 5 3

- 7 1 7

- 3 5

0 . 0 0

- 3 4 3

- 4 5

0 . 0 1

- 3 , 9 6 9

- 2 . 4

- 1 , 8 7 3

- 2 . 9

N o n e w e m p l o y m e n t

1 4 8

1 , 1 6 0

6 7 1

0

0

- 1 , 1 6 0

- 1 0 0

0 . 0 0

- 6 7 1

- 1 0 0

0 . 0 0

- 5 , 6 8 3

- 5 . 0

- 3 , 1 8 8

- 5 . 3

A l l

5 1 3

1 , 1 8 8

7 5 1

5 4

8

3 2 8

- 6 3 9

- 2 5

0 . 0 0

- 4 0 5

- 6 7

0 . 0 0

- 3 , 8 2 5

- 1 . 1

- 1 , 9 4 7

- 3 . 0

B : C E O

t o t a l p a y ( i n

$ t h o u s a n d s )

R e t a i n C E O a t o l d fi r m

9 2

4 , 1 4 3

1 , 1 8 8

2 , 4 8

4

1 , 2 4 1

- 1 , 6 5 9

4 6

0 . 0 0

2

1

0 . 0 7

- 9 , 8 9 7

3 . 0

0

0 . 0

T y p e o f n e w e m p l o y m e n t :

S t a y a s c h a i r m a n

3 0

4 , 3 7 8

1 , 0 7 1

1 , 6 6

1

9 4 5

- 2 , 7 1 7

4 6

0 . 0 7

- 3 4

- 7

0 . 1 3

- 1 3 , 5 9 6

3 . 2

0

0 . 0

R e t a i n h o n o r a r y p o s i t i o n

4 5

2 , 4 2 3

1 , 0 9 2

0

0

- 2 , 4 2 3

- 1 0 0

0 . 0 0

- 1 , 0 9 2

- 1 0 0

0 . 0 0

- 1 0 , 9 9 5

- 4 . 1

- 3 , 7 8 7

- 4 . 4

C E O a t a p u b . c o .

1 9

4 , 0 5 6

1 , 7 3 8

2 , 3 6

7

1 , 4 0 1

- 1 , 6 8 9

5 5

0 . 0 9

1 8 3

5 7

0 . 1 4

- 2 3 , 9 2 2

2 . 3

7 4

1 . 9

C E O a t a p v . c o .

5 8

4 , 3 8 7

1 , 6 4 3

1 , 7 7

2

1 , 1 0 0

2 , 6 1 5

1 7

0 . 3 4

- 4 3 0

- 4 6

0 . 3 9

- 1 5 , 9 3 2

1 . 2

- 2 , 5 8 9

- 1 . 7


p u b . c o .

4 5

3 , 2 2 8

1 , 7 7 0

2 , 1 6

5

1 , 2 9 5

- 1 , 0 6 3

4 8

0 . 0 5

- 4 5 5

- 2 6

0 4 2

- 5 , 2 3 8

3 . 4

- 2 , 9 5 0

- 1 . 7


p v . c o .

4 0

3 , 8 5 9

1 , 0 4 3

1 , 5 8

5

6 3 7

- 2 , 2 7 4

1

0 . 9 7

- 3 9 4

- 4 7

0 . 8 6

- 1 8 , 4 8 4

- 0 . 4

- 3 , 7 7 8

- 2 . 7

C o n s u l t a n t o r p o l i t i c i a n

1 6

2 , 9 7 5

9 9 1

3 4

6

3 4 4

- 2 , 6 2 9

- 5 2

0 . 0 0

- 6 5 0

- 6 7

0 . 0 1

- 1 2 , 3 9 1

- 3 . 3

- 4 , 2 3 9

- 3 . 9

S e l f - e m p l o y e d

2 0

6 , 1 0 8

2 , 2 2 1

7 1

2

7 0 8

- 5 , 3 9 6

- 2 6

0 . 2 2

- 1 , 4 8 5

- 6 7

0 . 1 6

- 3 5 , 7 1 7

- 0 . 5

- 3 , 9 9 4

- 0 . 9

N o n e w e m p l o y m e n t

1 4 8

3 , 7 1 7

1 , 1 0 8

0

0

- 3 , 7 1 7

- 1 0 0

0 . 0 0

- 1 , 1 0 8

- 1 0 0

0 . 0 0

- 2 1 , 1 1 6

- 4 . 6

- 4 , 3 7 8

- 4 . 9

A l l

5 1 3

3 , 8 4 5

1 , 2 5 0

1 , 1 8

3

3 9 3

- 2 , 6 6 2

- 2 1

0 . 0 0

- 6 3 9

- 8 0

0 . 0 0

- 1 5 , 9 2 4

- 0 . 6

- 2 , 6 6 0

- 2 . 7

52



Appendix Table 3CEO total compensation change of incumbent vs. new CEOs, and forced vs.

voluntary departure

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 -2

and 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. PV incomeloss is the present value of the total 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 payment at departure. The sample is 92 CEOs in place up to three years after emergence and 421 CEOsthat left their position between year -2 and three years after emergence at 342 large firms filing for US Chapter 11bankruptcy in 1996-2007. We drop observations where the pre-turnover total pay is missing or zero and observationsthat lie in the top five percentile in percentage change of total compensation (i.e. above 500%) to eliminate outliers.

Change in total comp ensation PV income lossmean median mean median

N $ % $ % $ multiple $ multiple

A: Incumbent CEOs vs. newly hired CEOs

All incumbent CEOs

Retain CEO at old firm 46 -2,166 17 -120 -11 -9,619 1.7 -241 -0.3Stay as chairman 22 -927 51 -34 -7 -9,063 3.3 0 0.0CEO at a pub. co. 10 -1,114 63 66 24 -16,194 2.7 1,027 1.3CEO at a pv. co. 35 -2,565 26 -131 -9 -13,006 1.7 -1,754 -0.9Non-CEO executive at a pub. co. 25 -1,999 42 -616 -26 -11,551 2.2 -3,487 -1.6Non-CEO executive at a pub. co. 24 -2,031 -24 -394 -49 -16,759 -2.1 -3,778 -2.7All full-time employment cat. 162 -1,973 24 -149 -17 -11,939 1.6 -656 -0.6Other or no employment 152 -4,080 -90 -1,335 -100 -22,141 -3.9 -4,513 -4.4All newly hired CEOs

Retain CEO position at old firm 46 -1,153 76 198 19 -10,176 4.3 477 0.7Stay as chairman 8 -7,640 33 -104 13 -26,059 3.0 0 0.0CEO at a pub. co. 9 -2,328 46 183 57 -30,640 1.4 16 0.9CEO at a pv. co. 23 -2,689 4 -632 -59 -20,322 0.5 -3,658 -3.7Non-CEO executive at a pub. co. 20 108 54 -317 -26 2,021 4.8 -2,176 -2.0Non-CEO executive at a pv. co. 16 -2,638 38 33 23 -20,747 1.9 -1,024 0.0All full-time employment cat. 122 -1,943 49 -23 -4 -13,836 3.1 -21 0.0Other or no employment 77 -2,454 -90 -746 -100 -14,969 -4.6 -3,594 -4.9

B: Forced departure vs. voluntary departure

All forced

Stay as chairman 3 -1,144 73 995 133 -8,429 5.9 7,786 12.0CEO at a pub. co. 13 -3,096 50 -173 -20 -36,294 1.8 -8,537 -2.4CEO at a pv. co. 38 -3,261 9 -785 -60 -22,597 0.2 -6,745 -3.3Non-CEO executive at a pub. co. 17 -1,981 -10 -620 -62 -16,729 -1.3 -5,805 -4.5

Non-CEO executive at a pv. co. 14 -1,784 44 71 31 -10,477 3.3 2,051 3.0All full-time employment cat. 85 -2,662 20 -498 -47 -20,646 0.9 -2,950 -2.8Other or no employment 140 -4,360 -88 -1,196 -100 -27,922 -4.7 -5,506 -5.4All voluntary

Stay as chairman 27 -2,891 43 -40 -11 -14,170 2.9 0 0.0

EckboThorburnWang_29May2012

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