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Director Networks and Credit Ratings

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  • Bradley W. Benson
  • Subramanian Rama Iyer
  • Kristopher J. Kemper
  • Jing Zhao

Abstract

We explore the effect of director social capital, directors with large and influential networks, on credit ratings. Using a sample of 11,172 firm†year observations from 1999 to 2011, we find that larger board networks are associated with higher credit ratings than both firm financial data and probabilities of default predict. Near†investment grade firms improve their forward†looking ratings when their board is more connected. Last, we find that larger director networks are more beneficial during recessions, and times of increased financial uncertainty. Our results are robust to controls for endogeneity. Tests confirm that causality runs from connected boards to credit ratings.

Suggested Citation

  • Bradley W. Benson & Subramanian Rama Iyer & Kristopher J. Kemper & Jing Zhao, 2018. "Director Networks and Credit Ratings," The Financial Review, Eastern Finance Association, vol. 53(2), pages 301-336, May.
    • Handle: RePEc:bla:finrev:v:53:y:2018:i:2:p:301-336
    DOI: 10.1111/fire.12157
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    Cited by:

    1. Li, Zhong-fei & Zhou, Qi & Chen, Ming & Liu, Qian, 2021. "The impact of COVID-19 on industry-related characteristics and risk contagion," Finance Research Letters, Elsevier, vol. 39(C).
    2. Lindsay Baran & Silu Cheng, 2024. "Director awards and board effectiveness," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 41-73, March.
    3. Lee, Sang Mook & Jiraporn, Pornsit & Kim, Young Sang & Park, Keun Jae, 2021. "Do co-opted directors influence corporate risk-taking and credit ratings?," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 330-344.
    4. Bhandari, Avishek & Golden, Joanna, 2021. "CEO political preference and credit ratings," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Guo, Hongling & Sun, Yue & Qiu, Xuemei, 2021. "Cross-shareholding network and corporate bond financing cost in China," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    6. Mansoor Afzali & Minna Martikainen, 2021. "Network centrality and value relevance of insider trading: Evidence from Europe," The Financial Review, Eastern Finance Association, vol. 56(4), pages 793-819, November.
    7. Hongling Guo & Zuoping Xiao, 2021. "Effect of severe litigation and bank connection on bank financing in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3883-3914, September.
    8. Suman Lodh & Monomita Nandy & Jaskaran Kaur, 2023. "Influence of governance bundles and directors' social capital on cash holding in foreign cross‐listed firms," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4271-4298, October.
    9. Ballester, Laura & González-Urteaga, Ana & Martínez, Beatriz, 2020. "The role of internal corporate governance mechanisms on default risk: A systematic review for different institutional settings," Research in International Business and Finance, Elsevier, vol. 54(C).

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