Working Paper: NBER ID: w22091
Authors: Yihui Pan; Tracy Yue Wang; Michael S. Weisbach
Abstract: Management risk occurs when uncertainty about future managerial decisions increases a firm’s overall risk. This paper argues that management risk is an important yet unexplored determinant of a firm’s default risk and the pricing of its debt. CDS spreads, loan spreads and bond yield spreads all increase at the time of CEO turnover, when management risk is highest, and decline over the first three years of CEO tenure, regardless of the reason for the turnover. A similar pattern but of smaller magnitude occurs around CFO turnovers. The increase in the CDS spread at the time of the CEO departure announcement, the change in the spread when the incoming CEO takes office, as well as the sensitivity of the spread to the new CEO’s tenure, all depend on the amount of prior uncertainty about the new management.
Keywords: Management Risk; Corporate Debt; Default Risk; CEO Turnover
JEL Codes: G32; G34; M12; M51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CEO turnover (M12) | increase in management risk (G34) |
| increase in management risk (G34) | increase in CDS spreads (F65) |
| increase in management risk (G34) | increase in loan spreads (G21) |
| increase in management risk (G34) | increase in bond yield spreads (E43) |
| new CEO tenure (M12) | decrease in management risk (G34) |
| decrease in management risk (G34) | decrease in CDS spreads (F65) |
| announcement of a successor (Y60) | decrease in CDS spreads (F65) |
| new CEO tenure (M12) | further decrease in CDS spreads (G19) |
| prior uncertainty about new CEO (D89) | increase in CDS spreads at departure announcement (F65) |
| designated heir apparent (Y70) | lower increase in CDS spreads at departure announcement (G19) |
| prior relationship between CEO and lender (G21) | lower sensitivity of interest rates (E43) |
| higher leverage (G32) | more pronounced decline in CDS spreads (F65) |
| management uncertainty diminishes over time (D80) | systematic decline in perceived default risk (G33) |
| CEO transitions (M12) | more significant effect on perceived default risk than CFO transitions (G32) |