How Management Risk Affects Corporate Debt

Fisher College of Business Working Paper No. 2016-03-06

Charles A. Dice Center Working Paper No. 2016-6

62 Pages Posted: 8 Mar 2016 Last revised: 13 Jan 2017

See all articles by Yihui Pan

Yihui Pan

University of Utah - Department of Finance

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 10, 2017

Abstract

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

Pan, Yihui and Wang, Tracy Yue and Weisbach, Michael S., How Management Risk Affects Corporate Debt (January 10, 2017). Fisher College of Business Working Paper No. 2016-03-06; Charles A. Dice Center Working Paper No. 2016-6. Available at SSRN: https://ssrn.com/abstract=2744645 or http://dx.doi.org/10.2139/ssrn.2744645

Yihui Pan

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Michael S. Weisbach (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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