Bankruptcy: Knowing When to Jump Ship
Bankruptcy is a brutal reminder of the gambles associated with the business world. But executives that depart before an organization tanks can avoid or reduce the stigma associated with a failed organization, contends research by Associate Professor Dr. Scott Lee.
Lee and colleagues Professor of Finance Dr. Donald Fraser, Dr. Albert Cannella of Arizona State University and former management PhD student Dr. Matthew B. Semadeni of the University of South Carolina examined more than 400 public and private banks that failed within a five-year period and the executives' actions during that time.
The study found that bankers who made preemptive exits were less likely to accept lower status employment because they distanced themselves from the social and personal stigma of a failed organization. "Our evidence demonstrates that jumping ship to blunt the effects of stigma is a viable option when executives perceive their firms to be failing," says Lee, who is a research fellow at Texas A&M University's Private Enterprise Research Center.
Another key outcome provided insight on the "innocent bystanders" — those top-level executives who managed healthy banks that closed because of financial problems with the holding company. This group faced fewer negative consequences, the study found, even when they didn't disassociate with the failed bank.
This illustrates, Lee says, that the labor market differentiates between accountable and unaccountable executives in assigning stigma. The labor market's sensitivity to accountability, he adds, is evident in the fact that lower-level executives experience less serious re-employment consequences than their superiors.
