Top management resignation and firms’ subsequent bankruptcy

Joseph D. Beams, Hua-Wei Huang, Yun Chia Yan

Research output: Contribution to journalArticle

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.

Original languageEnglish
Pages (from-to)39-54
Number of pages16
JournalAccounting and the Public Interest
Volume13
Issue number1
DOIs
Publication statusPublished - 2013 Dec 1

Fingerprint

Top management
Resignation
Bankruptcy
Investors
Disclosure
Chief executive officer
Logistic regression
Disadvantage
Moral hazard
Expenses
Private information
Predictors
Managers
Investing
Incentives
Agency theory

All Science Journal Classification (ASJC) codes

  • Accounting

Cite this

Beams, Joseph D. ; Huang, Hua-Wei ; Yan, Yun Chia. / Top management resignation and firms’ subsequent bankruptcy. In: Accounting and the Public Interest. 2013 ; Vol. 13, No. 1. pp. 39-54.
@article{f36c3f6e102c47159fe1008ec253dec2,
title = "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.",
author = "Beams, {Joseph D.} and Hua-Wei Huang and Yan, {Yun Chia}",
year = "2013",
month = "12",
day = "1",
doi = "10.2308/apin-10345",
language = "English",
volume = "13",
pages = "39--54",
journal = "Accounting and the Public Interest",
issn = "1530-9320",
publisher = "American Accounting Association",
number = "1",

}

Top management resignation and firms’ subsequent bankruptcy. / Beams, Joseph D.; Huang, Hua-Wei; Yan, Yun Chia.

In: Accounting and the Public Interest, Vol. 13, No. 1, 01.12.2013, p. 39-54.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Top management resignation and firms’ subsequent bankruptcy

AU - Beams, Joseph D.

AU - Huang, Hua-Wei

AU - Yan, Yun Chia

PY - 2013/12/1

Y1 - 2013/12/1

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=84943520631&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84943520631&partnerID=8YFLogxK

U2 - 10.2308/apin-10345

DO - 10.2308/apin-10345

M3 - Article

VL - 13

SP - 39

EP - 54

JO - Accounting and the Public Interest

JF - Accounting and the Public Interest

SN - 1530-9320

IS - 1

ER -