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Finance Seminar

Authors:

• Vidhan Goyal
  The Hong Kong University of Science and Technology

• Wei Wang
  Queen's University

We examine the use of key employee retention plans (KERPs) in bankrupt firms. Our results do not support the common view that retention bonus plans enrich managers at the expense of creditors. On the contrary, creditor control of bankruptcies increases the likelihood that bankrupt firms offer retention and incentive bonuses to managers. Retention bonus plans are also more common when there is a greater risk of employee turnover. We find that incentives provided under such plans improve bankruptcy outcomes for creditors along several dimensions: they increase the likelihood of emergence, reduce bankruptcy duration, and result in fewer violations of the absolute priority rule.