Organizational Bankruptcy: The Consequences of Failure on Director Human and Social Capital

Abstract

We develop a model to explore the changes in human and social capital for directors on the board of a failed firm subsequent to organizational bankruptcy. With arguments rooted in signaling theory (Spence, 1973), we propose a negative relationship between bankruptcy and new director appointments, in addition to a negative relationship between bankruptcy and the prestige of directorships. We then develop propositions on how board tenure, board size, initial social capital, and frequency of bankruptcies in an industry moderate the negative relationship between organizational failure with human and social capital.