How management risk affects corporate debt

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.