Do defaulting CEOs and directors increase the likelihood of financial distress of the firm?

Juha-Pekka Kallunki () and Elina Pyykkö ()
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Juha-Pekka Kallunki: University of Oulu
Elina Pyykkö: European Credit Research Institute at the Centre for European Policy Studies

Review of Accounting Studies, 2013, vol. 18, issue 1, No 8, 228-260

Abstract: Abstract We hypothesize that the information on a CEO’s and directors’ (board members) past personal payment default entries in public credit data files significantly increases the predictive power of Altman’s (in J Fin 23(4):589–609, 1968) and Ohlson’s (In J Acc Res 18(1):109–131, 1980) distress prediction models. We base our hypothesis on the literature showing that (1) managerial traits such as overconfidence, over-optimism, and the illusion of control affect corporate decisions and that (2) these same personal traits explain personal over-indebtedness and credit defaults. Our results of analyzing the credit data files of more than 100,000 CEOs and directors of the Finnish private limited liability companies support this hypothesis. Our results remain materially unchanged when using the bootstrapping method to assess their significance and when excluding small firms (firm size below the sample median). Collectively, our results imply that creditors should recognize the increased distress risk of firms appointing defaulting CEOs and directors.

Keywords: Financial distress; Bankruptcy; Insolvency; Corporate governance; Distress prediction (search for similar items in EconPapers)
JEL-codes: G33 G34 M40 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s11142-012-9203-x

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