Director Networks and Credit Ratings
50 Pages Posted: 2 Oct 2016 Last revised: 22 Oct 2016
Date Written: October 14, 2016
We explore the impact of director social capital on credit ratings. Social capital is often associated with trust and cultivated through one’s personal networks. We show that firms which employ well-connected directors benefit with a higher credit rating. This result is amplified for firms that add connected directors to a board with lower social capital. The benefit is also shown to be greater during times of economic uncertainty. Furthermore, connected boards lead a firm to higher rating than their Z-scores would otherwise predict. Finally, we show that the results are pronounced around the investment grade threshold. Taken together, this paper shows the economic benefits firms enjoy when they hire connected directors to their board. Our results confirm that the causality runs from the connected boards to firm credit rating.
Keywords: Director Networks, Social Capital, Credit Ratings, Board Connectivity
JEL Classification: G32, G24
Suggested Citation: Suggested Citation