University of Cincinnati Lindner College of Business

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Managerial Ability and Credit Ratings

Author(s): Kimberly Cornaggia, Gopal Krishnan, Changjiang Wang

Status: Accepted
Year: 2017
Publication Name: Contemporary Accounting Research


Abstract

We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher-ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross-sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high-ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high-quality management.


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