Eric A. Powers

Management turnover in subsidiaries of conglomerates versus stand-alone firms

An extensive prior literature documents the sensitivity of CEO turnover to performance. However, little is known about turnover in the firms internal labor market. We compare the likelihood of turnover following poor performance for a sample of subsidiary managers inside conglomerate firms to the likelihood of turnover of CEOs of comparable stand-alone firms. After controlling for a number of other factors, we find that subsidiary managers have a significantly higher likelihood of turnover following poor performance than CEOs of comparable stand-alone firms.

Setting the optimal make-whole call premium

With a make-whole call, the call price is calculated as the maximum of the par value and the present value of the bonds remaining payments discounted at the prevailing risk-free rate plus a pre-specified spread known as the make-whole premium. The commonly accepted thumb rule in the investment banking community is to set the make-whole premium at 15% of the at-issue credit spread. Using a standard structural model, we calculate the optimal make-whole call premium, i.e. the make-whole premium that maximizes the ex-ante firm value subject to managers following a second-best call policy that maximizes the ex-post equity value. For reasonable parameterizations, optimal make-whole premiums are relatively close to 15% of the model-generated credit spread. Thus, the 15% thumb rule provides surprisingly good guidance for setting make-whole call premiums.