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Credit Ratings, CEO Entrenchment, and Turnover: The Information Content of Credit Ratings

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Abstract

We study the relationship between credit rating changes and CEO turnover beyond firm performance. Within an adverse selection framework that explicitly incorporates rating change related turnover, our model predicts that a downgrade triggers turnover, even following a good firm performance. Our empirical results support this prediction. We show that credit rating downgrades explain forced turnover risk, both internal and external, after accounting for the firm prior stock market and accounting performance. Further, we find that the relationship between credit rating changes and management turnover is stronger when the degree of managerial entrenchment is low. Our results are robust to endogeneity concerns and shed light on the idea that the information content of credit ratings goes beyond firms’ performance.

Suggested Citation

  • Annamaria Menichini & Francesca Toscano, 2016. "Credit Ratings, CEO Entrenchment, and Turnover: The Information Content of Credit Ratings," CSEF Working Papers 459, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 18 Mar 2021.
  • Handle: RePEc:sef:csefwp:459
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    More about this item

    Keywords

    Contracts; Ratings; CEO Turnover;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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