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How Management Risk Affects Corporate Debt

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  • Yihui Pan
  • Tracy Yue Wang
  • Michael S Weisbach

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.

Suggested Citation

  • Yihui Pan & Tracy Yue Wang & Michael S Weisbach, 2018. "How Management Risk Affects Corporate Debt," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3491-3531.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:9:p:3491-3531.
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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