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CEO Compensation in Bankrupt Firms
Angela B Andrews, Wayne State University
Mbodja M. Mougoue, Wayne State University
ABSTRACT. Prior research has established a link between CEO compensation and bankruptcy. The literature, however, has been descriptive and plagued by small sample sizes. This paper seeks to fill a gap in the literature by examining CEO stock based compensation prior to a bankruptcy filing. We investigate whether firms re-contract with their CEOs in the years prior to the bankruptcy filing. Based on a sample of 505 firms that filed for bankruptcy between 1997 and 2005, we find that CEOs of firms that liquidate with high stock option ownership are awarded more option grants than firms that emerge from bankruptcy. In addition, CEOs of firms that liquidate have higher salaries than firms that emerge from bankruptcy. Our findings suggest that firms that liquidate have every incentive to focus on their own self-interests and take as much from the firm as possible, in the form of compensation.
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