Holding CEOs Accountable: Corporate Debt Maturity and the Timing of Vehicle Safety Recalls
79 Pages Posted: 5 Feb 2018 Last revised: 30 Sep 2019
Date Written: September 28, 2019
Vehicle firms strategically time safety-related recalls in response to historically issued long-term debt prescheduled to mature by the end of the fiscal year in which defective products are manufactured. Maturing debt does not predict recall events, largely matures in the last month of a firm's fiscal year, and correlates with issuance activities in the fiscal year-end. High-maturing-debt firms delay to recall their top-selling products by 1-2 quarters to avoid credit-rating downgrades prior to refinancing. The findings survive under a difference-in-differences approach and are robust to the instrument of end-of-year issuances by maturing debt. The effect of maturing debt on recall timing is more pronounced in firms holding less cash and is attenuated by the passage of anti-takeover laws. Recall delay increases the likelihood of firms receiving consumer complaints. NHTSA does not time investigations based on corporate debt maturity structure. Firms' self-claimed event chronologies are consistent with their recall timing. Contrary to company statements and some investigation reports, top management is typically aware of product defects.
Keywords: Vehicle safety recalls, Managers, Corporate fraud, Corporate policies, Corporate debt maturity, Product market strategy, Consumer safety, NHTSA
JEL Classification: G14, G28, G32, G33, M40
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