IDEAS home Printed from https://ideas.repec.org/a/spr/rvmgts/v18y2024i11d10.1007_s11846-023-00716-y.html
   My bibliography  Save this article

Why do firms fail? A new view on bankruptcy from the angle of top management team heterogeneity

Author

Listed:
  • Michael Geulen

    (RWTH Aachen University)

  • Andrea Greven

    (WHU – Otto Beisheim School of Management)

  • Denise Fischer-Kreer

    (RWTH Aachen University
    University of Bonn)

  • Malte Brettel

    (RWTH Aachen University)

Abstract

Avoiding bankruptcy is a crucial task for any firm’s top management team (TMT), and reasons for the failure to accomplish it have long been studied. While financial metrics can predict near-term bankruptcy, governance characteristics increase precision in the long term. With TMT heterogeneity, we introduce a powerful predictor for the critical time frame in between. Grounded in upper echelons theory, we argue that TMT age heterogeneity increases while heterogeneity in TMT pay and TMT functional backgrounds decreases the bankruptcy probability. We test our hypotheses using a unique dataset of large, public U.S. firms, about half of which filed for bankruptcy between 2001 and 2020. Our results support our research model and show how TMT heterogeneity significantly predicts bankruptcy. We contribute to both bankruptcy and strategic management research by underscoring the importance of TMT heterogeneity as a level of analysis when predicting bankruptcy and add to the ongoing discussion on the impact of TMT pay differences on firm performance. Additionally, we offer valuable insights to practitioners navigating their firms in times of crisis and to regulators shaping the insolvency statutes of the future.

Suggested Citation

  • Michael Geulen & Andrea Greven & Denise Fischer-Kreer & Malte Brettel, 2024. "Why do firms fail? A new view on bankruptcy from the angle of top management team heterogeneity," Review of Managerial Science, Springer, vol. 18(11), pages 3297-3331, November.
    • Handle: RePEc:spr:rvmgts:v:18:y:2024:i:11:d:10.1007_s11846-023-00716-y
    DOI: 10.1007/s11846-023-00716-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11846-023-00716-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11846-023-00716-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    2. Shai Bernstein & Emanuele Colonnelli & Benjamin Iverson, 2019. "Asset Allocation in Bankruptcy," Journal of Finance, American Finance Association, vol. 74(1), pages 5-53, February.
    3. Kalle Pajunen, 2006. "Stakeholder Influences in Organizational Survival," Journal of Management Studies, Wiley Blackwell, vol. 43(6), pages 1261-1288, September.
    4. Jo Thori Lind & Halvor Mehlum, 2010. "With or Without U? The Appropriate Test for a U‐Shaped Relationship," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 109-118, February.
    5. Adam L. Steinbach & Tim R. Holcomb & R. Michael Holmes Jr. & Cynthia E. Devers & Albert A. Cannella Jr., 2017. "Top management team incentive heterogeneity, strategic investment behavior, and performance: A contingency theory of incentive alignment," Strategic Management Journal, Wiley Blackwell, vol. 38(8), pages 1701-1720, August.
    6. Jason W. Ridge & Federico Aime & Margaret A. White, 2015. "When much more of a difference makes a difference: Social comparison and tournaments in the CEO's top team," Strategic Management Journal, Wiley Blackwell, vol. 36(4), pages 618-636, April.
    7. Joon Mahn Lee & Jung Chul Park & Timothy B. Folta, 2018. "CEO career horizon, corporate governance, and real options: The role of economic short‐termism," Strategic Management Journal, Wiley Blackwell, vol. 39(10), pages 2703-2725, October.
    8. Robert H. Chenhall & Frank Moers, 2007. "The Issue of Endogeneity within Theory-Based, Quantitative Management Accounting Research," European Accounting Review, Taylor & Francis Journals, vol. 16(1), pages 173-196.
    9. William McKinley, 1993. "Organizational Decline and Adaptation: Theoretical Controversies," Organization Science, INFORMS, vol. 4(1), pages 1-9, February.
    10. Richard F. J. Haans & Constant Pieters & Zi-Lin He, 2016. "Thinking about U: Theorizing and testing U- and inverted U-shaped relationships in strategy research," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1177-1195, July.
    11. Anna Nadolska & Harry G. Barkema, 2014. "Good learners: How top management teams affect the success and frequency of acquisitions," Strategic Management Journal, Wiley Blackwell, vol. 35(10), pages 1483-1507, October.
    12. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    13. Yuri Mishina & Timothy G. Pollock & Joseph F. Porac, 2004. "Are more resources always better for growth? Resource stickiness in market and product expansion," Strategic Management Journal, Wiley Blackwell, vol. 25(12), pages 1179-1197, December.
    14. Arturs Kalnins, 2018. "Multicollinearity: How common factors cause Type 1 errors in multivariate regression," Strategic Management Journal, Wiley Blackwell, vol. 39(8), pages 2362-2385, August.
    15. Maria Guadalupe & Hongyi Li & Julie Wulf, 2014. "Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management," Management Science, INFORMS, vol. 60(4), pages 824-844, April.
    16. Traczynski, Jeffrey, 2017. "Firm Default Prediction: A Bayesian Model-Averaging Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(3), pages 1211-1245, June.
    17. McKee, Thomas E. & Lensberg, Terje, 2002. "Genetic programming and rough sets: A hybrid approach to bankruptcy classification," European Journal of Operational Research, Elsevier, vol. 138(2), pages 436-451, April.
    18. Thomas Keil & Markku Maula & Henri Schildt & Shaker A. Zahra, 2008. "The effect of governance modes and relatedness of external business development activities on innovative performance," Strategic Management Journal, Wiley Blackwell, vol. 29(8), pages 895-907, August.
    19. Donald C. Hambrick & Richard A. D'Aveni, 1992. "Top Team Deterioration as Part of the Downward Spiral of Large Corporate Bankruptcies," Management Science, INFORMS, vol. 38(10), pages 1445-1466, October.
    20. Jay Dahya & John J. McConnell & Nickolaos G. Travlos, 2002. "The Cadbury Committee, Corporate Performance, and Top Management Turnover," Journal of Finance, American Finance Association, vol. 57(1), pages 461-483, February.
    21. Paul Kato & Jens Hagendorff, 2010. "Distance to default, subordinated debt, and distress indicators in the banking industry," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 853-870, December.
    22. Alexander Kücher & Stefan Mayr & Christine Mitter & Christine Duller & Birgit Feldbauer-Durstmüller, 2020. "Firm age dynamics and causes of corporate bankruptcy: age dependent explanations for business failure," Review of Managerial Science, Springer, vol. 14(3), pages 633-661, June.
    23. Sonja Sperber & Christian Linder, 2018. "The impact of top management teams on firm innovativeness: a configurational analysis of demographic characteristics, leadership style and team power distribution," Review of Managerial Science, Springer, vol. 12(1), pages 285-316, January.
    24. Shumway, Tyler, 2001. "Forecasting Bankruptcy More Accurately: A Simple Hazard Model," The Journal of Business, University of Chicago Press, vol. 74(1), pages 101-124, January.
    25. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    26. Codou Samba & Daan Van Knippenberg & C. Chet Miller, 2018. "The impact of strategic dissent on organizational outcomes: A meta‐analytic integration," Strategic Management Journal, Wiley Blackwell, vol. 39(2), pages 379-402, February.
    27. Georgia Giordani & Christos Floros & Guy Judge, 2014. "Econometric investigation of internet banking adoption in Greece," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(4), pages 586-600, July.
    28. Sanchez-Marin, Gregorio & Baixauli-Soler, J. Samuel, 2015. "TMT pay dispersion and firm performance: the moderating role of organizational governance effectiveness," Journal of Management & Organization, Cambridge University Press, vol. 21(4), pages 436-459, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jiarui Wang & Rong Cao & Gang Wang & Xuhui Peng, 2024. "Research on the Configuration Path of Innovation Performance of Strategic Emerging Enterprises," Sustainability, MDPI, vol. 16(21), pages 1-25, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cathcart, Lara & Dufour, Alfonso & Rossi, Ludovico & Varotto, Simone, 2020. "The differential impact of leverage on the default risk of small and large firms," Journal of Corporate Finance, Elsevier, vol. 60(C).
    2. Fischer, Denise & Greven, Andrea & Tornow, Mark & Brettel, Malte, 2021. "On the value of effectuation processes for R&D alliances and the moderating role of R&D alliance experience," Journal of Business Research, Elsevier, vol. 135(C), pages 606-619.
    3. Ahsan Habib & Mabel D' Costa & Hedy Jiaying Huang & Md. Borhan Uddin Bhuiyan & Li Sun, 2020. "Determinants and consequences of financial distress: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1023-1075, April.
    4. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    5. Tao, Qizhi & Chen, Carl & Lu, Rui & Zhang, Ting, 2017. "Underfunding or distress? An analysis of corporate pension underfunding and the cross-section of expected stock returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 116-133.
    6. Sigrist, Fabio & Leuenberger, Nicola, 2023. "Machine learning for corporate default risk: Multi-period prediction, frailty correlation, loan portfolios, and tail probabilities," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1390-1406.
    7. Charitou, Andreas & Dionysiou, Dionysia & Lambertides, Neophytos & Trigeorgis, Lenos, 2013. "Alternative bankruptcy prediction models using option-pricing theory," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2329-2341.
    8. Anand Deo & Sandeep Juneja, 2021. "Credit Risk: Simple Closed-Form Approximate Maximum Likelihood Estimator," Operations Research, INFORMS, vol. 69(2), pages 361-379, March.
    9. Jie Cao & Amit Goyal & Xiao Xiao & Xintong Zhan, 2023. "Implied Volatility Changes and Corporate Bond Returns," Management Science, INFORMS, vol. 69(3), pages 1375-1397, March.
    10. Koresh Galil & Neta Gilat, 2019. "Predicting Default More Accurately: To Proxy or Not to Proxy for Default?," International Review of Finance, International Review of Finance Ltd., vol. 19(4), pages 731-758, December.
    11. Nguyen, Ha, 2023. "An empirical application of Particle Markov Chain Monte Carlo to frailty correlated default models," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 103-121.
    12. Evangelos C. Charalambakis, 2015. "On the Prediction of Corporate Financial Distress in the Light of the Financial Crisis: Empirical Evidence from Greek Listed Firms," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(3), pages 407-428, November.
    13. Ye, Xiaoxia & Yu, Fan & Zhao, Ran, 2022. "Credit derivatives and corporate default prediction," Journal of Banking & Finance, Elsevier, vol. 138(C).
    14. Viral Acharya & Sergei A. Davydenko & Ilya A. Strebulaev, 2012. "Cash Holdings and Credit Risk," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3572-3609.
    15. Boubaker, Sabri & Cellier, Alexis & Manita, Riadh & Saeed, Asif, 2020. "Does corporate social responsibility reduce financial distress risk?," Economic Modelling, Elsevier, vol. 91(C), pages 835-851.
    16. Anand Deo & Sandeep Juneja, 2019. "Credit Risk: Simple Closed Form Approximate Maximum Likelihood Estimator," Papers 1912.12611, arXiv.org.
    17. Qiao, Lu & Fei, Junjun, 2022. "Government subsidies, enterprise operating efficiency, and “stiff but deathless” zombie firms," Economic Modelling, Elsevier, vol. 107(C).
    18. Evangelos C. Charalambakis & Ian Garrett, 2016. "On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms," Review of Quantitative Finance and Accounting, Springer, vol. 47(1), pages 1-28, July.
    19. George, Thomas J. & Hwang, Chuan-Yang, 2010. "A resolution of the distress risk and leverage puzzles in the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 96(1), pages 56-79, April.
    20. Bauer, Julian & Agarwal, Vineet, 2014. "Are hazard models superior to traditional bankruptcy prediction approaches? A comprehensive test," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 432-442.

    More about this item

    Keywords

    Top management team (TMT); Heterogeneity; Corporate governance; Bankruptcy; Firm survival;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:rvmgts:v:18:y:2024:i:11:d:10.1007_s11846-023-00716-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.