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This study examines whether and how managerial risk tolerance influences corporate credit ratings. Using information about private pilot licensing status as a proxy for CEO risk tolerance, we find that firms led by pilot CEOs have worse credit ratings after controlling for firm fundamentals, CEO risk-taking incentives, and other CEO characteristics. Path analyses show that risk-tolerant CEOs cause firms to receive worse credit ratings by impairing future firm value, exacerbating its volatility, and adversely influencing rating agencies’ assessments of the influence of management on credit risk. The negative association between CEO risk tolerance and corporate credit rating is more pronounced when management plays a more important role in the firm. Overall, our study sheds light on the implications of managerial risk tolerance by documenting its adverse effect on credit ratings.
Zhiyan Cao, University of Washington-Tacoma
Jeong-Bon Kim, City University of Hong Kong
Eliza Zhang, University of Washington Tacoma
Ray Zhang, Simon Fraser University