Managerial Ability, Credit Ratings, and the Cost of Debt

• In Event: Financial Accounting and Reporting 10

Abstract

Existing literature documents real economic effects associated with managerial ability. The
purpose of this paper is to document the extent to which credit rating agencies incorporate
managerial ability into corporate credit ratings and the extent to which bond investors price it.
Controlling for firm characteristics, we find that firms with higher-ability managers obtain more favorable credit ratings. Controlling for firm and issue-specific characteristics, we find that such firms further enjoy lower yield spreads. Our results have potential policy implications. To the extent that the newly relevant Regulation Fair Disclosure limits the interaction between credit rating analysts and issuer management, our results indicate that ratings may prove less informative in the post Dodd-Frank environment.

Authors

• Kimberly Cornaggia, American University

• Gopal V. Krishnan, American University

• Changjiang Wang, Florida International University