Managerial Ability and Credit Risk Assessment

56 Pages Posted: 23 Aug 2015 Last revised: 13 Apr 2017

See all articles by Samuel B. Bonsall

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting

Eric Holzman

The Ohio State University - Department of Accounting & Management Information Systems

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

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Date Written: September 10, 2015

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 ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine 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

JEL Classification: G30, J24

Suggested Citation

Bonsall, Samuel B. and Holzman, Eric and Miller, Brian P., Managerial Ability and Credit Risk Assessment (September 10, 2015). Kelley School of Business Research Paper No. 15-62. Available at SSRN: https://ssrn.com/abstract=2649161 or http://dx.doi.org/10.2139/ssrn.2649161

Samuel B. Bonsall

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Eric Holzman

The Ohio State University - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Brian P. Miller (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

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