When former CEO acts as board chair: Does this matter to debt policy and risk of default?

This paper scrutinises the interconnections among debt capital raising, firm risk of default, and the presence of a former CEO who now serves as a board chairperson, referred to as the Chair-Former-CEO (CFC). Employing a sample of the largest non-financial firms within the US S&P 500 from 2002 to 2019, our results reveal that, when compared to their non-CFC counterparts, CFCs exhibit a greater propensity for opting for lower debt finance raising strategies and are linked with a reduced firm distance-to-default. The CFC brings forth human and social capital that can enhance the board's capacity to monitor and guide incumbent CEOs, thereby fostering a more effective governance mechanism. This, in turn, will lead to a reduction in agency-related costs and an improvement in the firm's risk position. Additionally, we have uncovered an underlying mechanism through which this association takes place. The CFC prefers to pursue a low-risk financing mix strategy directly tied to a lower likelihood of default. The findings of this paper challenge established corporate governance codes, such as those in the US and the UK, which advocate for constraints on the internal promotion of CEOs to the Chair role. In contrast to these recommendations, our study suggests advantages to consolidating these roles, particularly for the intensity of monitoring, the firm's risk-taking behaviour, and its financial policies. This alignment with the research on CEO duality, which has yielded mixed results, challenges the traditional wisdom of segregating the roles of CEO and board chair.