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How management risk affects corporate debt

Author: Yihui Pan; Tracy Yue Wang; Michael S Weisbach; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2016.
Series: Working paper series (National Bureau of Economic Research), no. 22091.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
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  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Yihui Pan; Tracy Yue Wang; Michael S Weisbach; National Bureau of Economic Research,
OCLC Number: 945465161
Notes: "March 2016"
Description: 1 online resource (56 pages) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), no. 22091.
Responsibility: 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.

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