Henderson on Executive Compensation in Bankruptcy

Todd Henderson’s paper finds that compensation arrangements of solvent and insolvent firms are similar to each other. The empirical strategy involves the assumption that firms in bankruptcy are a useful control group for testing agency theory explanations of executive compensation because those costs are significantly lower for insolvent firms. I don’t know enough about bankruptcy to know how “clean” this control group is, but Henderson’s strategy is a simple, creative, and powerful empirical method for resolving competing theories about executive compensation. What would be really nice (from an econometric perspective I mean) to see is a test of how bankrupt and non-bankrupt firms respond to some additional, exogenous shock impacting executive compensation levels. HT: Larry Ribstein.