Our results show that bankruptcy experience doesn’t just stay in the past.
Mariya N. Ivanova
Past bankruptcies linked to higher risk in new firms
What happens when a company hires a CEO or board member who has previously been involved in bankruptcy? According to a study by Mariya N. Ivanova, the answer is: higher financial risk.
A bankruptcy on an executive’s CV may seem like a closed chapter. New research suggests it can still shape how companies are running years later. And: the consequences may differ between women and men.
In a large study of Swedish private firms, the study Yesterday is history, tomorrow is a mystery (see facts) finds a consistent pattern.
Companies with directors or CEOs who have previously experienced bankruptcy take on more debt, hold less cash, and face both a higher bankruptcy risk and a higher cost of borrowing.
Doesn’t just stay in the past
`Our results show that bankruptcy experience doesn’t just stay in the past, ´ says Mariya N. Ivanova, Associate Professor at the Department of Accounting, Auditing and Law, NHH.
`It appears to be linked to how much risk executives are willing to take in their future roles´.
The findings support what the researchers call an innate characteristics explanation. In short, executives who end up in bankrupt firms may already have a higher tolerance for risk – and those preferences continue to shape decisions in new companies.
Reference:
Yesterday is history, tomorrow is a mystery: Directors’ and CEOs’ prior bankruptcy experiences and the financial risk of their current firms. In Journal of Business Finance and Accounting. By Mariya N. Ivanova, Henrik Nilsson, Milda Tylaite
`We find that bankruptcy experience works as a signal, ´ Ivanova explains.
`Firms with such executives are, on average, financially riskier than comparable firms without them. ´
Women, men and risk in the boardroom
The study also documents gender differences in corporate financial decision-making.
Firms led by female CEOs tend, on average, to pursue a more conservative financial policy, with lower leverage and higher cash holdings, than firms led by men. This is consistent with a broad body of research showing that men, on average, are more inclined to take financial risks.
`Gender emerges as a systematic factor in how corporate risk is managed. This does not mean that women are less ambitious, but rather that they tend to choose different financial strategies. ´
The findings suggest that gender matters not only for those who reach top positions, but also for how power is exercised once there. This perspective is relevant in discussions about leadership, diversity, and risk-taking in business.
Clues about a firm’s risk profile
The study also looks at the personal consequences of bankruptcy for executives. While CEOs and directors involved in bankruptcies do experience income losses, these effects are typically temporary.
Executives’ prior experiences can provide important clues about a firm’s risk profile.
Mariya N. Ivanova
`The financial penalties fade over time. That may help explain why we don’t see bankruptcy experiences leading to more cautious behavior later´.
Taken together, the results suggest that information about executives past bankruptcies may be valuable beyond the firm where the bankruptcy occurred.
`In settings where financial information is opaque – as it often is for private firms – executives’ prior experiences can provide important clues about a firm’s risk profile. ´
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