Decision Makers Making Bankruptcy Decisions - An empirical analysis on how CEOs and directors with past bankruptcy experience affect the likelihood of future bankruptcy in Swedish private firms

Sammanfattning: We investigate the impact of CEOs' and directors' past professional bankruptcy experience on future corporate performance in the context of Swedish private sector. The bankruptcy prediction models (Altman, 1968; Ohlson, 1980) and the upper echelons theory (Hambrick & Mason, 1984) underpin this research. We hypothesize that appointing CEOs and directors with prior bankruptcy involvements will increase the likelihood of bankruptcy of the firm they subsequently join in. Empirical results identify a significantly positive association between bankruptcy experience of CEOs and directors, and bankruptcy of future firms, which supports our hypotheses. Furthermore, we find that incorporating the information on CEOs' and directors' previous bankruptcy involvements can improve the predictive power and classification performance of bankruptcy forecasting models (Altman, 1968; Ohlson, 1980). Moreover, the significant outcomes that individuals with bankruptcy experiences will increase the future bankruptcy probability shed light to future behaviours in Swedish private firms, warning both debtholders and investors to take past professional experiences of CEOs and directors into consideration when making decisions.