The Effect of CEO Power on Bond Ratings and Yields

The Journal of Empirical Finance, Forthcoming

48 Pages Posted: 29 Mar 2010

See all articles by Yixin Liu

Yixin Liu

University of New Hampshire

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Date Written: March 23, 2010

Abstract

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

Liu, Yixin and Jiraporn, Pornsit, The Effect of CEO Power on Bond Ratings and Yields (March 23, 2010). The Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1577304

Yixin Liu (Contact Author)

University of New Hampshire ( email )

Durham, NH 03824
United States
603-862-3357 (Phone)

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

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