Examining the relationship between Managerial Ability and Credit Ratings: A Case Study of USA Oil and Gas Sectors

Chaudhry Abdullah Imran Sahi, Memoona Khalid, Muhammad Farooq Tariq Butt and Abid Rasheed

Audit and Accounting Review, 2023, vol. 3, issue 1, 52-77

Abstract: The current study aims to investigate the association between a firm’s managerial ability and its issued credit rating. For this purpose, Twelve (12) companies in the USA oil and gas sectors have been selected based on their different work streams. A two-stage derived model of data envelopment analysis and the Tobit model is used for the measurement of firm’s managerial ability in this paper. For data envelopment analysis, cost of goods sold, fixed assets, general and administration expenses and intangible assets are used as input variable and operating revenue is used as output variable. To retain residual as firm’s managerial ability, Tobit model is estimated by using firm size, stock returns, leverage, operating cash flows and firm age as variables. The value of correlation test between credit ratings and firm’s managerial ability is 0.163, which indicates that there is positive linear relationship. Moreover, it is identified that an associated managerial ability is increased by 100%, credit rating also increased by 16.3%. The relationship between managerial ability and credit rating is significant and positive for USA oil and gas sectors from the period of 2006-2020. While regression analysis for all oil and gas companies of the USA indicated that 2.7% changes in credit rating occurred due to managerial ability. Therefore, this study suggests to enhance the managerial ability of firms, which leads to higher credit rating and consequently less cost of debt for their debt instruments.

Keywords: Credit Rating Agencies (CRA); credit rating; data envelopment analysis; managerial ability; Tobit Model (search for similar items in EconPapers)
Date: 2023
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