Abstract
We study how CEO turnover, jointly with product market competition, affects firm leverage policy. About 18% of public nonfinancial US firms in Compustat experience significant switches in their long-term leverage policy every year. Without apparent changes in their operating fundamentals. We find that CEO turnover, especially external and forced turnover, explains shifts in long-term leverage policy. In addition, utilizing the product market fluidity measure and large import tariff changes, we find that, only when coinciding with intensified product market competition, external and forced CEO turnover is significantly and positively associated with the likelihood of firms leveraging up from zero to positive. Our evidence suggests that external and forced CEO turnover is an important vehicle for accomplishing changes in corporate policies necessitated by increases in product market competition.
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