Corporate Bankruptcy and Managers' Self-Serving Behavior




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    • Both authors from Krannert School of Management, Purdue University. We would like to thank Arthur Andersen & Co. and G. Law, the head librarian of the Krannert Library, for their generous assistance in our data collection effort and Cynthia Quillen for her careful research. We are grateful to an anonymous referee for this Journal and René Stulz for their comments and suggestions. We are also grateful to Wolfgang Bensel, who was involved in the preliminary stages of this study. We benefited from the comments of Clifford Holderness, Wayne Marr, David Mauer, and Wayne Mikkelson, from discussion with the Krannert Brown Bag Economists, and from comments received during seminars at Purdue University, the University of Iowa, and the University of Rochester. An earlier version of this paper was presented at the 1987 American Finance Association Meetings.


We investigate whether insiders of bankrupt firms hold less stock or reduce their stockholdings compared to what we observed for insiders of similar firms that do not go bankrupt. We find little evidence of such time-series and cross-sectional differences in spite of the fact that the stock value of bankrupt firms falls by more than ninety percent in the five years preceding bankruptcy. One implication of our results is that the amount of stock owned and the magnitude of the trades undertaken by corporate insiders of both bankrupt and nonbankrupt firms appear to provide no information about firm value.