Managerial Ability and Credit Ratings

Abstract

We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher-ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross-sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high quality management.

Keywords: Credit Ratings, Information intermediary, Managerial ability, Soft Information

JEL Classification: G24, G28