The Role of Lending Banks in Forced CEO Turnovers |
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Authors: | SADI OZELGE ANTHONY SAUNDERS |
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Affiliation: | Sadi Ozelgeis a Vice President at a Financial Services Company (E‐mail: s_o_ozelge@hotmail.com). Anthony SaundersisJohn M. SchiffProfessor of Finance, Stern School of Business, Department of Finance, New York University. (E‐mail: asaunder@stern.nyu.edu) |
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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. |
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Keywords: | G29 G30 G32 CEO turnover covenant violations bank financing monitoring |
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