CEO Turnover and Bankrupt Firms’ Emergence

Abstract

This thesis examines the relationship between CEO turnover and bankrupt firm emergence using 836 bankruptcy cases under Chapter 11 of the U.S. Bankruptcy Code from 1989 to 2016. To resolve the intensified information asymmetry during bankruptcy proceedings, we hypothesise that CEO turnover could be used by high-quality firms as a positive signal to the market to indicate good fundamentals and a higher likelihood of emergence. We provide strong evidence that CEO turnover can positively predict bankrupt firm emergence. We further show that the positive effect of CEO turnover on firm emergence is further amplified in more intensified information asymmetry types of bankruptcy proceedings such as free falls, in which there was no prior negotiation between creditors and the firm. We also show that the use of a CEO turnover strategy is costly in the sense of a longer emergence duration, which is consistent with our expectation that this costly signal is effective to decouple high-quality firms from low-quality firms. However, our claim of CEO turnover as a voluntary/strategic signalling tool can also be explained by an alternative explanation, namely, the improved management theory. This theory argues that low-quality firms may replace their incompetent CEOs to pursue better management, which improves the likelihood of firm emergence. Nevertheless, using a negative exogenous shock sample during the Global Financial Crisis, our claim appears to hold, as good-fundamental firms utilise CEO turnover as a strategic signal more frequently than bad-fundamental firms do. Our results are consistent with the scapegoat theory, which states that CEO dismissal is the result of a strategic signal sent by the board rather than an indication of a CEO’s incompetence, causing such a CEO to be viewed as a scapegoat. Finally, our results are robust to the Global Financial Crisis and other alternative specifications.