The Role of Lending Banks in Forced CEO Turnovers

Authors


  • We would like to thank Holger Mueller, Kose John, Martin Gruber, Yakov Amihud, Hae Jin Chung, Alexander Ljungqvist, Yang Lu, Jeffrey Wurgler, and Ali Yurukoglu for their comments. Gozde Ozelge and Burcin Sonmez provided excellent research assistance. We also thank Dirk Jenter and Fadi Kanaan for generously providing us with their forced CEO turnover data. We are grateful for helpful comments from Robert DeYoung (the editor) and an anonymous referee.

Abstract

This article investigates the governance role of banks exercised through the replacement of underperforming CEOs in borrowing firms. An average level of bank loans outstanding implies a 22% to 47% increase in the forced turnover probability of a borrowing firm’s CEO if a firm’s industry adjusted performance is one standard deviation below average. This increase is much larger, 68% to 92%, when an underperforming firm violates its loan covenants. Overall, the paper’s findings suggest that banks play a key role in the governance of underperforming firms, especially when covenants are violated.

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