Managers' Personal Bankruptcy Costs and Risk Taking

Managers' Personal Bankruptcy Costs and Risk Taking

David Schoenherr

Series number :

Serial Number: 
512/2017

Date posted :

September 24 2016

Last revised :

April 23 2018
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Keywords

  • Bankruptcy • 
  • benefits of control • 
  • capital structure • 
  • investment • 
  • law and economics

Exploiting a bankruptcy reform in Korea, I examine di erences in rms’ nancing and investment decisions under a receivership and a management stay system. Under the receivership system, incumbent management is replaced by a court-appointed trustee, who sells the rm to new investors.

Under the post-reform management stay system, incumbent management stays in control during bankruptcy proceedings. I nd that rms curb risk-taking under the receivership system. Speci cally, rms take on lower leverage, forego risky investment, and reduce innovation. These e ects are strongest for rms in which private bene ts of control are large and managers face high personal bankruptcy costs.

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