Top Management Resignation and Firms' Subsequent Bankruptcy

ABSTRACT

Agency theory indicates that a moral hazard occurs when an agent (manager) with superior information has an incentive to behave inappropriately from the perspective of the principal (investor) with inferior information. Because of the superior information that top executives have, they will recognize if the company is declining before outside investors. This gives the executives an opportunity to resign prior to the investors' awareness of the decline. An executive can use this private information to benefit at the expense of the investing public. This study investigates a sample of 9,942 firm-years from 2008 and 2009 and our logistic regression results show a significant relationship between CEO and CFO resignations and the firm's subsequent bankruptcy, even after controlling for other predictors of bankruptcy. However, when both variables are included in the model, only CFO resignation is significant. Due to the significance of these resignations, when some investors have greater details of the reasons for the resignations or receive the information before others, the requirements of the full disclosure principle are not being met. Requiring more timely and forthcoming disclosures about executive resignations may prevent the public from being at a disadvantage when a top executive resigns.

Keywords:  CEO, CFO, resignation, bankruptcy

Source : Joseph D. Beams, Hua-Wei Huang, and Yun-Chia Yan (2013) Top Management Resignation and Firms' Subsequent Bankruptcy. Accounting and the Public Interest: December 2013, Vol. 13, No. 1, pp. 39-54.