CEO Turnover and Debt Policy Change
47 Pages Posted: 24 Dec 2010
Date Written: December 22, 2010
We empirically examine the influence of CEOs on corporate financial policy. We focus our analysis on significant changes in financial policy by focusing on firms that change their debt policy from zero leverage to positive leverage or from positive leverage to zero leverage at least once during their Compustat history. We find that CEO turnover, and in particular external CEO turnover (i.e., replacement of the CEO with someone from outside the firm) is a significant determinant of debt policy changes. Our results are robust after controlling for known determinants of capital structure, corporate governance, and potential endogeneity of CEO turnover. We find that the leverage of the replacement CEO’s former company tends to be consistent with the direction of the debt policy change. We also find that the frequency of CEO turnover is much less when the firm never changes its debt policy (i.e., is always levered or unlevered). Our evidence establishes that CEOs have a first-order influence on corporate financial policy.
Keywords: CEO turnover, debt policy, capital structure, corporate culture
JEL Classification: G32, G34, M14
Suggested Citation: Suggested Citation