The Stigma of Bankruptcy: Spoiled Organizational Image and Its Management

Interview, archival, and observational data from four computer firms were used to develop a theory about how Chapter 11 of the Federal Bankruptcy Code spoils the image of top managers and firms. We propose that Chapter 11 is a discrediting label that causes key organizational audiences to have negative reactions towards a firm, including disengagement, reduction in the quality of participation, bargaining for more favorable exchange relationships, and denigrating an organization and its leaders. Those negative reactions further increase the probability of organizational death and threaten managerial careers. We also propose a hierarchy of stigma-management strategies that leaders may use in their efforts to avert or repair the spoiled images of top management and firms.