How Management Risk Affects Corporate Debt

Yihui Pan, Tracy Yue Wang and Michael Weisbach

No 22091, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G32 G34 M12 M51 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-bec, nep-cfn and nep-rmg
Note: AP CF
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Citations: View citations in EconPapers (2)

Published as Yihui Pan & Tracy Yue Wang & Michael S Weisbach, 2018. "How Management Risk Affects Corporate Debt," The Review of Financial Studies, vol 31(9), pages 3491-3531.

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