Debt Contracting on Management
69 Pages Posted: 2 Apr 2016 Last revised: 23 Sep 2018
Date Written: August 30, 2018
Change of management restrictions (CMRs) in loan contracts give lenders explicit ex-ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower to retain talent.
Keywords: Debt Contracting, Human Capital, CEO Turnover
JEL Classification: D82, G20, G32, G34, J24
Suggested Citation: Suggested Citation