Yoko Shibuya

Abstract

This paper studies potential barriers to CEO succession processes at small- and medium- sized enterprises (SMEs)—personal guarantee commitments on business loans. A personal guarantee is a promise made by an individual to accept responsibility for the business’ debt if the business fails to repay. When incumbent CEOs take out business loans with per- sonal guarantee commitments, successor CEOs often have to inherit the same commitment. Therefore, receiving loans with personal guarantees may impede the CEO succession pro- cess by discouraging potential successors from taking over the business for fear of financial risk. Exploiting the 2014 Japanese policy reform that encourages banks to reduce the use of personal guarantees on SME loans, we find that receiving loans without personal guarantees is associated with a higher succession likelihood in the following period, with a particularly strong effect for firms with incumbent CEOs above retirement age and good credit ratings. We also find that CEO succession lowers CEO age and improves firm performance. Our find- ings suggest that incumbent CEOs’ financial choices significantly affect the CEO succession process and the consequent firm performance.