How management risk affects corporate debt

We evaluate whether management risk, coming from uncertainty about management's value added, affects firms' default risks and debt pricing. We find that, regardless of the reason for the turnover, CDS spreads, loan spreads and bond yield spreads all increase at the time of management turnover, when management risk is highest, and decline over the first three years of CEO tenure. The effects increase with the prior uncertainty about the new management. These results are consistent with the view that management risk affects firms' default risk. An understanding of management risk yields a number of implications for corporate finance