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Nothing gained from jumping ship when bankruptcy looms

August 1, 2002

For more information, contact: Benjamin Haimowitz, HHaimowitz@aol.com

Study of Texas banks finds that execs who jumped ended up no better than those who stayed put

Given the importance that executives attach to knowing things early and acting quickly, it would seem that dodging the stigma of company bankruptcy would come as naturally to upper management as getting out of the rough comes to Tiger Woods.

And, in fact, a new study presented at the 2002 annual meeting of the Academy of Management (Aug. 11-14, Denver), finds an upsurge in executive ship-jumping (as the authors put it) in months before business failures.

But, surprisingly, those who jump ship do no better in their subsequent employment than those who stay until the bankruptcy occurs. And those who suffer the most from early departure are the most senior executives.

The study, carried out at Texas A&M University, focuses on the widespread failures among Texas banks from 1985 through 1990, a six-year period providing a large sample of executives undergoing similar decision processes in similar firms. Banking executives, the authors note, are likely to be particularly sensitive to the stigma of bankruptcy, because personal relationships with borrowers often are essential to successful banking careers. As the authors put it, "Bank executives have good reason to fear that the stigma of bankruptcy will paint their careers and poison the good relationships that they have worked hard to build and maintain."

Findings were based on data from 437 public and private Texas banks closed by the FDIC and from a matching sample of Texas banks that didn't fail. For both each failed bank and its match the identity of chairman, president, CEO, and executive vice presidents was determined for one and two years prior to failure and then compared with the list of executives at failure. Those who had left were classified as ship-jumpers. About 1,000 executives each from the failed banks and the banks matched with them comprised the sample of bank managers for the study.

A subsequent search of a computerized list of all managers of Texas banks and thrifts as of July 1993 was used to determine the incidence of reemployment in Texas banking.

The prospect of bankruptcy produced an upsurge of ship-jumping among the troubled banks: about 30 percent of the executives in banks destined for failure terminated their employment prior to bankruptcy, compared to only about 12 percent of managers in matched banks during that same period.

And how did the ship-jumpers make out compared to their colleagues who stayed at the failed banks until the end? As of July 1993 there was no statistically significant difference between the two groups in the proportions of those who had subsequently been promoted, demoted or stayed at the same level. In other words, ship-jumping provided no career advantage.

And among those at the top, it seems to have worked to their detriment. Of ship-jumpers below the level of president, about 21 percent had been promoted and 32 percent had been demoted as of July 1993. Among those who were presidents or higher, none had been promoted and 39 percent had been demoted.

Lead author of the study is Albert A. Cannella Jr., a professor of management at Texas A&M's graduate school of business, who collaborated with Donald R. Fraser and D. Scott Lee of the school's department of finance and Matthew B. Semadeni of the department of management.

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