Debt Maturity and the Threat of Human Capital Departure — Evidence from CEOs near Retirement Age

Abstract

Employees are free to leave a firm. The mere threat of losing human capital should affect firms' debt financing as Hart and Moore (1994) argue. However, little empirical evidence exists. I uncover such evidence by studying how loans change as CEOs approach retirement age. I find that loan maturities shorten substantially when CEOs are near mandatory or customary retirement age, as well as near their instrumented or actual retirement. Among loans within the same firm-year, maturities decline by more if lenders are overall more averse to new CEOs, or if lenders perceive a larger increase in uncertainty about CEOs. Comparing loans within the same firm-year controls for observable and unobservable factors related to firms or CEOs, and suggests that lenders drive the shortening of loan maturities. Moreover, if the CFO is also departing, loan maturities decline by more. If the retired CEO stays in another role or an internal successor is identified, loan maturities do not decrease. Overall, results suggest that loan maturities shorten because lenders change the menu of loan contracts in response to the threat of firms losing key human capital.

Keywords: Human Capital, Debt Maturity, CEO, Retirement Age

JEL Classification: G34, G32