Managerial Risk Tolerance and Corporate Credit Ratings

Posted: 9 May 2023

See all articles by Zhiyan Cao

Zhiyan Cao

University of Washington Tacoma

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Eliza Xia Zhang

University of Washington, Tacoma - Milgard School of Business

Ray Zhang

Simon Fraser University - Beedie School of Business

Date Written: April 29, 2023

Abstract

This study examines the relation between managerial risk tolerance and corporate credit ratings. Using pilot licensing status as a proxy for managerial risk tolerance, we find that firms led by pilot CEOs receive worse credit ratings, suggesting that highly risk-tolerant CEOs impair their firms’ credit ratings. Further analyses of the underlying mechanisms show that highly risk-tolerant CEOs harm their firms’ ratings by adopting more aggressive financial policies, engaging less in (effective) risk management, and participating in other aggressive firm behaviors. The negative association between CEO risk tolerance and credit ratings is stronger when a firm faces high financial risk, and its CEO plays a dominant role in the management team. Additional analyses show that higher CEO risk tolerance is associated with wider credit spreads but not stock price crash or jump risks. Overall, our evidence implies that managerial risk tolerance plays an important role in influencing corporate credit ratings and highlights that highly risk-tolerant managers damage debt investors’ welfare but provide no net benefits to equity investors.

Keywords: Managerial risk tolerance; pilot CEO; corporate credit rating; credit risk; investor welfare

Suggested Citation

Cao, Zhiyan and Kim, Jeong-Bon and Zhang, Eliza Xia and Zhang, Ray, Managerial Risk Tolerance and Corporate Credit Ratings (April 29, 2023). Available at SSRN: https://ssrn.com/abstract=4436611

Zhiyan Cao

University of Washington Tacoma ( email )

1900 Commerce St
Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692-4821 (Phone)
(253) 692-4523 (Fax)

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Eliza Xia Zhang (Contact Author)

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Tacoma, WA 98402-3100
United States

Ray Zhang

Simon Fraser University - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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