Credit Risk Assessment and Executives' Legal Expertise
49 Pages Posted: 16 Sep 2021
Date Written: September 14, 2021
We study whether firms that are led by chief executive officers (CEOs) with a law degree (lawyer CEOs) have different credit ratings and costs of debt from other firms. Our sample consists of Standard & Poor’s 1500 firms from 1992 to 2015, 9.2% of which have lawyer CEOs. We find that these firms have better credit ratings compared to other firms. On average, their cost of debt is 6.76% lower than that of firms led by CEOs who lack a legal background. Our results are robust to different specifications, sampling methods, and controls, such as firm and CEO characteristics. We identify two channels for the process of translating CEO expertise into higher credit ratings. Lawyer CEOs are associated with a lower future volatility of stock returns and a reduction in information risk. The decreased business risk and better financial reporting are associated with 7% lower auditing fees for firms with lawyer CEOs.
Keywords: Credit ratings, CEOs, legal education, cost of capital, audit pricing
JEL Classification: G11; G17; G12
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