IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v85y2023icp73-92.html
   My bibliography  Save this article

Management efficiency uncertainty and its implications for bondholders

Author

Listed:
  • Chen, Tsung-Kang
  • Tseng, Yijie
  • Hung, Yu-Shun
  • Huang, Mei-Ling

Abstract

We empirically examine whether and how management efficiency uncertainty (MEU) affects the loss risks of bondholders with a theoretical application model. We find that a greater MEU increases the loss risks of bondholders by increasing a firm's assessed asset value volatility and incomplete information while management efficiency has the opposite effect by increasing the firm's profitability and decreasing financial leverage. Moreover, the MEU effect becomes weaker for firms with greater profitability. Finally, we further find that managers' state-contingent payoffs increase MEU and thus the loss risks of bondholders.

Suggested Citation

  • Chen, Tsung-Kang & Tseng, Yijie & Hung, Yu-Shun & Huang, Mei-Ling, 2023. "Management efficiency uncertainty and its implications for bondholders," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 73-92.
    • Handle: RePEc:eee:reveco:v:85:y:2023:i:c:p:73-92
    DOI: 10.1016/j.iref.2022.12.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056022003161
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2022.12.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    2. Jean Helwege & Christopher M. Turner, 1999. "The Slope of the Credit Yield Curve for Speculative‐Grade Issuers," Journal of Finance, American Finance Association, vol. 54(5), pages 1869-1884, October.
    3. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
    4. Samuel B. Bonsall IV & Eric R. Holzman & Brian P. Miller, 2017. "Managerial Ability and Credit Risk Assessment," Management Science, INFORMS, vol. 63(5), pages 1425-1449, May.
    5. Yihui Pan & Tracy Yue Wang & Michael S Weisbach, 2018. "How Management Risk Affects Corporate Debt," Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3491-3531.
    6. Bok Baik & David B. Farber & Sam (Sunghan) Lee, 2011. "CEO Ability and Management Earnings Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 28(5), pages 1645-1668, December.
    7. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    8. Chemmanur, Thomas J. & Paeglis, Imants & Simonyan, Karen, 2009. "Management Quality, Financial and Investment Policies, and Asymmetric Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(5), pages 1045-1079, October.
    9. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    10. Yihui Pan & Tracy Yue Wang & Michael S. Weisbach, 2015. "Learning About CEO Ability and Stock Return Volatility," Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1623-1666.
    11. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    12. Kimberly J. Cornaggia & Gopal V. Krishnan & Changjiang Wang, 2017. "Managerial Ability and Credit Ratings," Contemporary Accounting Research, John Wiley & Sons, vol. 34(4), pages 2094-2122, December.
    13. John Y. Campbell & Glen B. Taksler, 2003. "Equity Volatility and Corporate Bond Yields," Journal of Finance, American Finance Association, vol. 58(6), pages 2321-2350, December.
    14. Lu, Chia-Wu & Chen, Tsung-Kang & Liao, Hsien-Hsing, 2010. "Information uncertainty, information asymmetry and corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2265-2279, September.
    15. Tsung-Kang Chen & Yijie Tseng, 2021. "Readability of Notes to Consolidated Financial Statements and Corporate Bond Yield Spread," European Accounting Review, Taylor & Francis Journals, vol. 30(1), pages 83-113, January.
    16. 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.
    17. Peter Demerjian & Baruch Lev & Sarah McVay, 2012. "Quantifying Managerial Ability: A New Measure and Validity Tests," Management Science, INFORMS, vol. 58(7), pages 1229-1248, July.
    18. Tsung-Kang Chen & Yijie Tseng & Yu-Ting Hsieh, 2015. "Real Earnings Management Uncertainty and Corporate Credit Risk," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 413-440, September.
    19. Edwin J. Elton & Martin J. Gruber & Deepak Agrawal & Christopher Mann, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, February.
    20. Shivaram Rajgopal & Terry Shevlin & Valentina Zamora, 2006. "CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts," Journal of Finance, American Finance Association, vol. 61(4), pages 1813-1844, August.
    21. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, May.
    22. Warga, Arthur, 1992. "Bond Returns, Liquidity, and Missing Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(4), pages 605-617, December.
    23. Allan Eberhart & William Maxwell & Akhtar Siddique, 2008. "A Reexamination of the Tradeoff between the Future Benefit and Riskiness of R&D Increases," Journal of Accounting Research, Wiley Blackwell, vol. 46(1), pages 27-52, March.
    24. Cragg, John G. & Donald, Stephen G., 1993. "Testing Identifiability and Specification in Instrumental Variable Models," Econometric Theory, Cambridge University Press, vol. 9(2), pages 222-240, April.
    25. Chen, Tsung-Kang & Chen, Yan-Shing & Liao, Hsien-Hsing, 2011. "Labor unions, bargaining power and corporate bond yield spreads: Structural credit model perspectives," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2084-2098, August.
    26. Yu, Fan, 2005. "Accounting transparency and the term structure of credit spreads," Journal of Financial Economics, Elsevier, vol. 75(1), pages 53-84, January.
    27. Shi, Charles, 2003. "On the trade-off between the future benefits and riskiness of R&D: a bondholders' perspective," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 227-254, June.
    28. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Tsung-Kang & Liao, Hsien-Hsing & Chen, Wei-Lun, 2014. "Production efficiency uncertainty and corporate credit risk: Structural form credit model perspectives," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 266-280.
    2. Chen, Tsung-Kang & Liao, Hsien-Hsing & Kuo, Hui-Ju & Hsieh, Yu-Ling, 2013. "Suppliers’ and customers’ information asymmetry and corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3181-3191.
    3. Tsung-Kang Chen & Hsien-Hsing Liao & Wen-Hsuan Chen, 2017. "CEO ability heterogeneity, board’s recruiting ability and credit risk," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1005-1039, November.
    4. Tsung-Kang Chen & Yijie Tseng & Yu-Ting Hsieh, 2015. "Real Earnings Management Uncertainty and Corporate Credit Risk," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 413-440, September.
    5. Chen, Tsung-Kang & Liao, Hsien-Hsing & Tsai, Pei-Ling, 2011. "Internal liquidity risk in corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 978-987, April.
    6. Nejadmalayeri, Ali & Nishikawa, Takeshi & Rao, Ramesh P., 2013. "Sarbanes-Oxley Act and corporate credit spreads," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2991-3006.
    7. Guo, Liang, 2013. "Determinants of credit spreads: The role of ambiguity and information uncertainty," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 279-297.
    8. Tsung-Kang Chen & Hsien-Hsing Liao & Hsiao-Chun Huang, 2014. "Macroeconomic risks of supply chain counterparties and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 43(3), pages 463-481, October.
    9. Chen, Tsung-Kang & Liao, Hsien-Hsing & Chi, Cheng-Ming, 2014. "The economic consequences of regulatory changes in employee stock options on corporate bond holders: SFAS No.123R and structural credit model perspectives," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 381-394.
    10. Lu, Chia-Wu & Chen, Tsung-Kang & Liao, Hsien-Hsing, 2010. "Information uncertainty, information asymmetry and corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2265-2279, September.
    11. Shang, Chenguang, 2021. "Dare to play with fire? Managerial ability and the use of short-term debt," Journal of Corporate Finance, Elsevier, vol. 70(C).
    12. Han, Bing & Zhou, Yi, 2015. "Understanding the term structure of credit default swap spreads," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 18-35.
    13. Han-Hsing Lee, 2020. "Distress risk, product market competition, and corporate bond yield spreads," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 1093-1135, October.
    14. Chen, Tsung-Kang & Liao, Hsien-Hsing & Kuo, Hui-Ju, 2013. "Internal liquidity risk, financial bullwhip effects, and corporate bond yield spreads: Supply chain perspectives," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2434-2456.
    15. Nejadmalayeri, Ali & Mathur, Ike & Singh, Manohar, 2013. "Product market advertising and corporate bonds," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 78-94.
    16. Stellner, Christoph & Klein, Christian & Zwergel, Bernhard, 2015. "Corporate social responsibility and Eurozone corporate bonds: The moderating role of country sustainability," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 538-549.
    17. Tsung-Kang Chen & Hsien-Hsing Liao, 2018. "Suppliers’/customers’ production efficiency uncertainty and firm credit risk," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 519-560, February.
    18. Tang, Dragon Yongjun & Yan, Hong, 2010. "Market conditions, default risk and credit spreads," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 743-753, April.
    19. Wei Hao & Andrew Prevost & Udomsak Wongchoti, 2018. "Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market," Financial Management, Financial Management Association International, vol. 47(4), pages 865-909, December.
    20. Song Han & Xing Zhou, 2014. "Informed Bond Trading, Corporate Yield Spreads, and Corporate Default Prediction," Management Science, INFORMS, vol. 60(3), pages 675-694, March.

    More about this item

    Keywords

    Management efficiency uncertainty; Bond yield spread; Credit risk; Structural credit risk model;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:85:y:2023:i:c:p:73-92. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.