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The Role of Lending Banks in Forced CEO Turnovers

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  • SADI OZELGE
  • ANTHONY SAUNDERS

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.

Suggested Citation

  • Sadi Ozelge & Anthony Saunders, 2012. "The Role of Lending Banks in Forced CEO Turnovers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 631-659, June.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:4:p:631-659
    DOI: 10.1111/j.1538-4616.2012.00504.x
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    2. Theodora Bermpei & Antonios Nikolaos Kalyvas & Leone Leonida, 2021. "Local Public Corruption and Bank Lending Activity in the United States," Journal of Business Ethics, Springer, vol. 171(1), pages 73-98, June.
    3. Akhtar Tahir, 2022. "Corporate governance, excess-cash and firm value: Evidence from ASEAN-5," Economics and Business Review, Sciendo, vol. 8(4), pages 39-67, December.
    4. He, Qing & Huang, Jiyuan & Li, Dongxu & Lu, Liping, 2016. "Banks as corporate monitors: Evidence from CEO turnovers in China," BOFIT Discussion Papers 19/2016, Bank of Finland Institute for Emerging Economies (BOFIT).
    5. Tahir Akhtar & Mohammad Ali Tareq & Kashif Rashid, 2023. "The role of shareholders and creditors' rights in affecting cash holdings and firm value: A recent evidence from ASEAN," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 929-961, January.
    6. Song, Keke & Wang, Jun, 2023. "When banks become shareholder activists," Journal of Banking & Finance, Elsevier, vol. 153(C).
    7. Shai Levi & Benjamin Segal & Dan Segal, 2021. "Does fiduciary duty to creditors reduce debt covenant violation avoidance behavior?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 929-953, May.

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