Ceo Turnover and the agency cost of debt



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Texas Tech University


This dissertation examines the impact of CEO turnover on bondholder’s wealth. Using publicly traded corporate bond data for the period from 1973 to 2000, I find that CEO turnover events are generally value decreasing to bondholders. Specifically, I find that (i) CEO turnover events are associated with higher yield spreads, (ii) bondholders are most affected when the CEO is forced out, when the CEO is replaced by an outsider of the firm, and when the replacement is from outside industry, (iii) CEO turnover effects are more pronounced in firms with non-investment than investment grade debt, and (vi) losses to bondholders are a function of governance variables such as board size, institutional holdings, CEO equity ownership, and CEO age and tenure. Further testing examining the likelihood of a change in credit ratings for forced, outside, and outside industry turnover announcements indicates that bond ratings are more likely to be downgraded than upgraded one month after the event. This dissertation also examines the relationship between the cost of publicly traded debt and CEO turnover and provides evidence that higher debt costs are associated with an increased likelihood of forced CEO turnover. The results contribute to the understanding of the effects of corporate governance mechanisms, of which CEO turnover is an extreme form, on bondholders.



Top management turnover, Corporate governance, Bondholders