CEO tenure and cost of debt

Owusu, Andrews, Kwabi, Frank, Ezeani, Ernest ORCID: https://orcid.org/0000-0003-0401-9000 and Owusu-Mensah, Ruth (2022) CEO tenure and cost of debt. Review of Quantitative Finance and Accounting, 59 (2). pp. 507-544. ISSN 0924-865X

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Abstract

In this study, we investigate the relationship between CEO tenure and cost of debt. Using a sample of the FTSE All-Share Index firms listed on the London Stock Exchange for the period 2009 to 2018 and the ordinary least squares regression (OLS) estimation method, we find that cost of debt is higher for firms with CEOs in their early tenure in office than those in their later tenure in office. Further analysis shows that board independence attributes including (1) the proportion of independent directors on the board, (2) full (100 per cent) independent audit committee members, and (3) a lead independent director representation on the board interact with CEO early tenure in office to reduce cost of debt due to the board’s effective monitoring ability when the CEO is new and risk-seeking. Our study extends CEO tenure and corporate outcomes in general and in particular CEO risk-taking incentives and cost of debt literature, and has important implications for firms seeking to raise finance from the debt market when their CEO is new as well as identifying the control mechanisms that they need to put in place to lower the cost of debt.