Lame Duck CEOs' Horizons: Evidence from CEO Retirement and Loan Maturity

Abstract

CEOs who know they will leave office in the near future are likely to have shorter horizons than other CEOs, and thus are likely to focus on short-term payoffs or decrease their effort. To detect shorter horizons, I focus on the maturities of firms' new loans, since this decision has an observable time dimension. I find that as CEOs approach retirement, maturities of new loans shorten, but are just long enough for more loans to mature soon after CEOs retire. The shorter maturities lead to lower loan spreads. Departing CEOs appear to care less about firms' refinancing risk after their departure, but more about interest savings before their departure. I also find that firms near CEOs' retirement decrease acquisitions. Such firms also hold more cash, presumably due to fewer activities requiring liquidity and CEOs' effort before retirement. Results on loan maturities, acquisitions and cash all hold, when instrumenting for CEOs' departure using departure probabilities based on industry and CEOs' age.