How Management Risk Affects Corporate Debt

Yihui Pan, Tracy Yue Wang and Michael Weisbach

The Review of Financial Studies, 2018, vol. 31, issue 9, 3491-3531

Abstract: We evaluate whether management risk, which arises from investors’ uncertainty about management’s added value, affects firms’ default risks and debt pricing. We find that, regardless of the reason for the turnover, CDS, loan, and bond yield spreads increase at the time of management turnover, when management risk is highest, and decline over the first three years of the new CEO’s tenure. The effects increase with prior investor uncertainty about the new management. These results are consistent with the view that management risk affects firms’ default risk. An understanding of management risk yields a number of implications for corporate finance. Received May 15, 2016; editorial decision February 27, 2017 by Editor David Denis.

Date: 2018
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Working Paper: How Management Risk Affects Corporate Debt (2016)
Working Paper: How Management Risk Affects Corporate Debt (2016)
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