Managerial Ability and Credit Risk Assessment

Samuel B. Bonsall Iv (), Eric R. Holzman () and Brian P. Miller ()
Additional contact information
Samuel B. Bonsall Iv: Ohio State University, Columbus, Ohio 43210; Pennsylvania State University, University Park, Pennsylvania 16802
Eric R. Holzman: Indiana University, Bloomington, Indiana 47405; Ohio State University, Columbus, Ohio 43210
Brian P. Miller: Indiana University, Bloomington, Indiana 47405

Management Science, 2017, vol. 63, issue 5, 1425-1449

Abstract: Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants’ interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher credit ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine chief executive officer (CEO) replacements and document that ratings increase (decrease) when CEOs are replaced with more (less) able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk.

Keywords: credit ratings; cost of debt capital; managerial ability; managerial efficiency (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (76)

Downloads: (external link)
https://doi.org/10.1287/mnsc.2015.2403 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1425-1449

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().