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Director Networks and Credit Ratings

50 Pages Posted: 2 Oct 2016 Last revised: 22 Oct 2016

Bradley W. Benson

Ball State University - Department of Finance and Insurance

Subramanian R. Iyer

University of New Mexico

Kristopher Kemper

Ball State University

Jing Zhao

Portland State University - The School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2016

Abstract

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

Benson, Bradley W. and Iyer, Subramanian R. and Kemper, Kristopher and Zhao, Jing, Director Networks and Credit Ratings (October 14, 2016). Available at SSRN: https://ssrn.com/abstract=2846187

Bradley Benson

Ball State University - Department of Finance and Insurance ( email )

Muncie, IN 47306-0340
United States
765-285-5299 (Phone)
765-285-4314 (Fax)

Subramanian Iyer (Contact Author)

University of New Mexico ( email )

MSC 05-3090
U of New Mexico
Albuquerque, NM 87131
United States

Kristopher Kemper

Ball State University ( email )

Miller College of Business
Whitinger Business Building
Muncie, IN 47306
United States
765-285-5200 (Phone)

Jing Zhao

Portland State University - The School of Business ( email )

631 SW Harrison St.
Portland, OR 97201
United States

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