How Management Risk Affects Corporate Debt
Charles A. Dice Center Working Paper No. 2016-6
62 Pages Posted: 8 Mar 2016 Last revised: 13 Jan 2017
Date Written: January 10, 2017
We evaluate whether management risk, coming from uncertainty about management’s value added, affects firms’ default risks and debt pricing. We find that, regardless of the reason for the turnover, CDS spreads, loan spreads and bond yield spreads all increase at the time of management turnover, when management risk is highest, and decline over the first three years of CEO tenure. The effects increase with the prior uncertainty about the new management. These results are consistent with the view that management risk affects firms’ default risk. An understanding of management risk yields a number of implications for corporate finance.
Keywords: Corporate default risk, uncertainty about management, CEO turnover, CEO tenure, CFO, exogenous turnover, loan spread, bond yield spread, CDS spread, precautionary saving
JEL Classification: G32, G34, M12, M51
Suggested Citation: Suggested Citation