Directors’ Professional Devaluation from Firm Bankruptcy: an Integrated Model of the Effects of Stigma, Devaluated Competence, and Gained Experience

Building on signaling theory and the literature on judgment under uncertainties, I examine the effects of a stigmatizing event on board of directors’ professional future. I ask if the professional devaluation of directors--in terms of number of board appointments, quality of board appointments, and compensation from board appointments--takes place due to the stigma of incompetence, or courtesy stigma, or layered stigma. My theoretical model differentiates among directors associated with (1) the origin of the bankruptcy, (2) its filing, and (3) the organizational reorganization. I associate bankruptcy origination with stigma of incompetence, and bankruptcy filing with courtesy stigma. In addition, I argue that monitoring a company through bankruptcy reorganization is a value-increasing experience and will be rewarded by the executive labor market. Finally, the model considers the possibility of overlaps in the involvement of directors in more than one stage of Chapter 11 bankruptcy, and the associated consequences in the executive labor market. My findings confirm that, indeed, directors are treated differently by the elite labor market, because of the types of stigmas they carry. More specifically, directors, who are stigmatized as incompetent, carry fewer board appointments than those who are stigmatized by association. Although my predictions about the effects of layered stigma and the effects of involvement in reorganization were not supported, I uncovered some promising relationships that may indicate stigma internalization by compromised board members.