CEO Turnover and Bondholder Wealth

Abstract

We examine the impact of CEO turnover announcements on bondholder wealth, stockholder wealth, and firm value. Using publicly traded data for the period from 1973 to 2000, we find that CEO turnover events while value enhancing to stockholders, are value decreasing to bondholders, and overall have an insignificant impact on firm value. The evidence is consistent with the wealth transfer hypothesis but inconsistent with the signaling explanation. Losses to bondholders are a function of turnover type (forced, outside replacement, and outside industry replacement) and riskiness of the firm¿s debt (investment vs non-investment grade debt). Further cross sectional testing, controlling for firm and security specific measures, confirm these findings. The results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders.

Keywords: top management turnover, corporate governance, bondholder's wealth, firm value

JEL Classification: G3, G14