The Impact of CEO Duality and Prestige on a Bankrupt Organization

Everyone is most likely painfully aware of the raft of recent corporate scandals and bankruptcies (Byrne et al., 2002). The current environment suggests a strong probability for changes in the rules affecting governance and bankruptcy. In this light, we present a study that examines a piece of the governance issue following the last major change in the bankruptcy laws (i.e., The Bankruptcy Reform Act of 1978). Specifically, we examine the influence of a CEO's power and his or her influence on organizational performance subsequent to bankruptcy filing. When management files for bankruptcy protection, it proclaims the organization's deterioration with a definitive measure of performance (Daily, 1994). Although some bankruptcies are strategic in nature (Flynn and Farid, 1991; Johnson et al., 1986; McConnell and Servaes, 1991; Moulton and Thomas, 1993), most result from an organization's inability to meet debt obligations (Altman, 1993), which is, after all, the legal definition of bankruptcy. How organizations get in such a predicament remains debatable (e.g., Daily, 1994). However, two perspectives dominate the literature--one proposes that failure is the fault of no one (e.g., Aldrich, 1979; Hannan and Freeman, 1977), and the other holds management culpable (e.g., Ansoff, 1988; Child, 1972). Consistent with the latter perspective, we assume that leaders do in fact affect organizational performance. Our assumption is consistent with both the strategic choice perspective (Ansoff, 1988; Child, 1972; Cyert and March, 1963; Thompson, 1967) and upper echelon research (e.g., Dooley and Fryxell, 1999; Hambrick and Mason, 1984; Hambrick and Fukutomi, 1991; Hambrick et al., 1996; Thomas, 1988; Zahra and Pearce, 1989). Regardless of why the organization is bankrupt, responsibility falls upon the leadership to effect repairs and recovery. This presents a problem since the potential for any recovery is precarious, particularly when those same people accountable for the initial failure (i.e., management) now become responsible for the subsequent recovery. Intuitively, "the problem causers [sic] should not become the problem solvers" (Whetten, 1987: 349). Since it was management that most likely caused the failure (Altman, 1993), or at least failed to prevent it (Khanna and Poulsen, 1995), it follows that something about management must change. The purpose of this study is to examine an area in strategic management that is virtually unexplored--that is, the period in an organization's life beginning immediately upon a bankruptcy filing through its return to normalcy. In particular, we examine the influence of Chief Executive Officer (CEO) power, both formal as determined by duality and informal determined by prestige. Our study begins after an organization has filed for bankruptcy. Furthermore, we extend the extant research stream on organizational failure by examining the post-failure period; this is done in three stages. First, assuming the organization does survive, we examine the duration of the time spent under bankruptcy protection (reorganization time). Second, we compare those organizations that survive with those that did not to examine the odds of emerging from the bankruptcy process. Finally, we examine the length of time necessary for recovery and return to industry performance parity following emergence from bankruptcy protection (recovery time). In the following sections we review the theoretical background routinely applied to bankruptcy research. We then review the applicable research on organizational bankruptcies and extend it to focus on the period after initial filing of Chapter 11 protection. We then incorporate the formal and informal power of the CEO and provide hypotheses to test their influences on bankruptcy outcomes. CEO Duality and Prestige In organizations larger than the "Mom & Pop" corner grocery store, power is rarely absolute (Dooley and Fryxell, 1999; Hambrick and Mason, 1984). …