The Effect of CEO Power on Bond Ratings and Yields
The Journal of Empirical Finance, Forthcoming
48 Pages Posted: 29 Mar 2010
Date Written: March 23, 2010
We argue that executives can affect firm outcomes only if they have influence over crucial decisions. This study explores the impact of CEO power or CEO dominance on bond ratings and yield spreads. We find that credit ratings are lower and yield spreads higher for firms whose CEOs have more decision-making power. To further investigate why bondholders are concerned about CEO power, we show that powerful CEOs tend to maintain an opaque information environment. Bondholders demand higher yields because it is difficult for them to monitor managers in firms with powerful CEOs. Taken together, the results suggest that bondholders perceive CEO power as a critical determinant of the cost of bond financing.
Keywords: CEO power, cost of bond financing, agency theory, bondholders
JEL Classification: G32, G34, G38
Suggested Citation: Suggested Citation