A curse or a blessing? The Impacts of CEO Turnovers
February 04, 2015,
With the steady increase of CEO turnovers worldwide hitting a high of almost 15 percent in 2013, investigating the impacts of changes at the top management level is a timely topic.
Interestingly enough, there had been no significant studies on this topic until this past summer. That’s when professors of finance Saiying Deng and Vincent Intintoli from Southern Illinois University Carbondale’s College of Business joined forces to conduct research on the impacts of “CEO Turnover on Bank Loan Contracting.”
Their study examined how private lenders, such as banks, react to a CEO turnover and subsequently incorporate this change into their loan decisions.
“For example, such a drastic change could cause uncertainty in the firm’s operation – in the strategic direction that the firm might take – not to mention in the performance,” Deng said. “That is also because, at this point, we do not know yet who might be the successor – and, under the new leadership, what is going to be the new strategic plan. And where is this new guy taking the firm to the next level? So these are all uncertainties.”
“We would expect the lenders to incorporate the uncertainty associated with the CEO turnover in their lending decision,” Deng added. “But how do we examine this empirically? So we looked at both the price and the non-price terms of bank loans, including loan interests, covenant restrictions and collateral requirements.”
As anticipated by the scholars, the outcome confirms their hypotheses.
“Our results have shown that banks do indeed take this CEO turnover into their lending decision,” Deng said. “Hence there are adverse effects of turnovers on both the price and non-price terms.
Specifically, she said, the banks will charge more interest rates on the firms with turnovers when they borrow bank loans. The banks also are more likely to require collaterals attached to the bank loans and impose more strict covenants on the borrowers.
Clearly the worry about the new boss commonly causes uncertainty that leads to financial repercussions. But by being aware of such a domino effect, the firms can take immediate steps to alleviate uncertainty among their lenders. In case of a forced turnover, for instance, one such step could be the hiring of an outsider, according to the SIU scholars.
During this past summer, Deng and her colleague worked closely on this particular project and made good progress thanks to the receipt of the 2014 Annual Summer Faculty Research Grant (SFRG), which gave them the necessary financial freedom to focus on their research. Another major success factor was the collaboration itself.
“It’s really the first time I worked with a colleague so physically close,” Deng said. “It’s very convenient. If we would come up with ideas, he would just stop by my office, and vice versa. So we constantly exchanged ideas. It just makes communication a little easier.”
Deng and Intintoli are in the process of evaluating additional analyses, and they plan on submitting the paper in time for the start of the spring semester.
“We are excited to share our findings with our students to have them benefit from cutting-edge research, and we strongly encourage them to keep up with the latest industry journals at all times,” Deng said.
And that’s the beauty of a research higher institution such as Southern Illinois University.