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The effect of CEO power on bond ratings and yields

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  • Liu, Yixin
  • Jiraporn, Pornsit

Abstract

We argue that executives can affect firm outcomes only if they have influence over crucial decisions. This study explores the impact of CEO power or CEO dominance on bond ratings and yield spreads. We find that credit ratings are lower and yield spreads higher for firms whose CEOs have more decision-making power. To further investigate why bondholders are concerned about CEO power, we show that powerful CEOs tend to maintain an opaque information environment. Bondholders demand higher yields because it is difficult for them to monitor managers in firms with powerful CEOs. Taken together, the results suggest that bondholders perceive CEO power as a critical determinant of the cost of bond financing.

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  • Liu, Yixin & Jiraporn, Pornsit, 2010. "The effect of CEO power on bond ratings and yields," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 744-762, September.
  • Handle: RePEc:eee:empfin:v:17:y:2010:i:4:p:744-762
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    Cited by:

    1. Walid Bahloul & Abdelfettah Bouri, 2016. "The Efficiency of the European Non-Life Insurance: CEO Power, Macroeconomic, and Market Characteristics Impact," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 4(1), pages 1-13, March.
    2. Hornstein, Abigail S., 2013. "Corporate capital budgeting and CEO turnover," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 41-58.
    3. repec:eee:corfin:v:45:y:2017:i:c:p:19-30 is not listed on IDEAS
    4. repec:eee:ememar:v:33:y:2017:i:c:p:42-61 is not listed on IDEAS
    5. Li, Tongxia & Munir, Qaiser & Abd Karim, Mohd Rahimie, 2017. "Nonlinear relationship between CEO power and capital structure: Evidence from China's listed SMEs," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 1-21.
    6. Yixin Liu & Yilei Zhang & Pornsit Jiraporn, 2016. "Firm Risk-Taking and CEO Visibility," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-23, September.
    7. repec:eee:ecofin:v:42:y:2017:i:c:p:487-503 is not listed on IDEAS
    8. Pornsit Jiraporn & Napatsorn Jiraporn & Adisak Boeprasert & Kiyoung Chang, 2014. "Does Corporate Social Responsibility (CSR) Improve Credit Ratings? Evidence from Geographic Identification," Financial Management, Financial Management Association International, vol. 43(3), pages 505-531, September.
    9. Mathur, Ike & Singh, Manohar & Nejadmalayeri, Ali & Jiraporn, Pornsit, 2013. "How do bond investors perceive dividend payouts?," Research in International Business and Finance, Elsevier, vol. 27(1), pages 92-105.
    10. Voulgaris, Georgios & Stathopoulos, Konstantinos & Walker, Martin, 2014. "IFRS and the Use of Accounting-Based Performance Measures in Executive Pay," The International Journal of Accounting, Elsevier, vol. 49(4), pages 479-514.
    11. repec:gam:jijfss:v:4:y:2016:i:1:p:4:d:64800 is not listed on IDEAS
    12. repec:bla:stratm:v:38:y:2017:i:13:p:2623-2646 is not listed on IDEAS
    13. Jiraporn, Pornsit & Jumreornvong, Seksak & Jiraporn, Napatsorn & Singh, Simran, 2016. "How do independent directors view powerful CEOs? Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 16(C), pages 268-274.
    14. Tanaka, Takanori, 2016. "How do managerial incentives affect the maturity structure of corporate public debt?," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 130-146.
    15. Pornsit Jiraporn & Pandej Chintrakarn & Yixin Liu, 2012. "Capital Structure, CEO Dominance, and Corporate Performance," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(3), pages 139-158, December.
    16. ManYing Kang & Marcel Ausloos, 2017. "An Inverse Problem Study: Credit Risk Ratings as a Determinant of Corporate Governance and Capital Structure in Emerging Markets: Evidence from Chinese Listed Companies," Papers 1712.00602, arXiv.org.
    17. Chou, Ting-Kai & Ou, Chin-Shyh & Tsai, Shu-Huan, 2014. "Value of strategic alliances: Evidence from the bond market," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 42-59.
    18. Rihab Grassa, 2016. "Corporate governance and credit rating in Islamic banks: Does Shariah governance matters?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 20(4), pages 875-906, December.
    19. Alexander B. Matthies, 2013. "Empirical Research on Corporate Credit-Ratings: A Literature Review," SFB 649 Discussion Papers SFB649DP2013-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    20. repec:eee:intfin:v:52:y:2018:i:c:p:196-210 is not listed on IDEAS

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