The association between corporate general counsel and firm credit risk

This paper examines whether bond market participants alter their credit risk assessments of firms that appoint the corporate general counsel (GC) to senior management. GCs may place less emphasis on their gatekeeping responsibilities upon appointment to senior management, thus potentially resulting...

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Bibliographic Details
Published in:Journal of accounting & economics 2016-04, Vol.61 (2-3), p.274-293
Main Authors: Ham, Charles, Koharki, Kevin
Format: Article
Language:English
Subjects:
Appointments & personnel changes
Bond markets
Credit rating agency
Credit risk
General counsel
Professional responsibilities
Public Company Accounting Reform & Investor Protection Act 2002-US
Risk assessment
Studies
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Summary:This paper examines whether bond market participants alter their credit risk assessments of firms that appoint the corporate general counsel (GC) to senior management. GCs may place less emphasis on their gatekeeping responsibilities upon appointment to senior management, thus potentially resulting in increased firm credit risk. Using changes in firm-level credit ratings and credit default swap spreads to proxy for changes in credit risk, we find a positive association between GC promotions to senior management and increases in firm credit risk. Additionally, the increased personal liability for GCs under the Sarbanes–Oxley Act only partially mitigates this association. •General counsels (GCs) can limit their gatekeeping functions as members of the executive team, altering firms׳ risk profiles.•GC promotions to senior management are positively associated with increases in firm credit risk.•Sarbanes Oxley partially mitigated GCs׳ negative impact on firm credit risk by reestablishing their gatekeeping role.
ISSN:0165-4101
1879-1980
DOI:10.1016/j.jacceco.2016.01.001