Management efficiency uncertainty and its implications for bondholders

Abstract

We empirically examine whether and how management efficiency uncertainty (MEU) affects the loss risks of bondholders with a theoretical application model. We find that a greater MEU increases the loss risks of bondholders by increasing a firm's assessed asset value volatility and incomplete information while management efficiency has the opposite effect by increasing the firm's profitability and decreasing financial leverage. Moreover, the MEU effect becomes weaker for firms with greater profitability. Finally, we further find that managers' state-contingent payoffs increase MEU and thus the loss risks of bondholders.