Credit Ratings, CEO Entrenchment, and Turnover: The Information Content of Credit Ratings

We study the relationship between credit rating changes and CEO turnover beyond firm performance. Within an adverse selection framework that explicitly incorporates rating change related turnover, our model predicts that a downgrade triggers turnover, even following a good firm performance. Our empirical results support this prediction. We show that credit rating downgrades explain forced turnover risk, both internal and external, after accounting for the firm prior stock market and accounting performance. Further, we find that the relationship between credit rating changes and management turnover is stronger when the degree of managerial entrenchment is low. Our results are robust to endogeneity concerns and shed light on the idea that the information content of credit ratings goes beyond firms’ performance.