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Managerial Ability and Credit Risk Assessment

Author

Listed:
  • Samuel B. Bonsall IV

    (Ohio State University, Columbus, Ohio 43210; Pennsylvania State University, University Park, Pennsylvania 16802)

  • Eric R. Holzman

    (Indiana University, Bloomington, Indiana 47405; Ohio State University, Columbus, Ohio 43210)

  • Brian P. Miller

    (Indiana University, Bloomington, Indiana 47405)

Abstract

Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants’ interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher credit ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine chief executive officer (CEO) replacements and document that ratings increase (decrease) when CEOs are replaced with more (less) able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk.

Suggested Citation

  • Samuel B. Bonsall IV & Eric R. Holzman & Brian P. Miller, 2017. "Managerial Ability and Credit Risk Assessment," Management Science, INFORMS, vol. 63(5), pages 1425-1449, May.
  • Handle: RePEc:inm:ormnsc:v:63:y:2017:i:5:p:1425-1449
    DOI: 10.1287/mnsc.2015.2403
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    References listed on IDEAS

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