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Managerial Risk Tolerance and Corporate Credit Ratings

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Title:Managerial Risk Tolerance and Corporate Credit Ratings
Authors:Zhiyan Cao
Jeong-Bon Kim
Eliza X. Zhang
Ray Zhang
Keywords:Managerial risk tolerance
pilot CEO
corporate credit rating
Date Issued:29 Aug 2019
Abstract:This study examines whether and how managerial risk tolerance influences corporate credit ratings. Using the possession of a private pilot license to capture 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 lead to worse credit ratings by reducing the level of future firm value, increasing the volatility of future firm value, and changing rating agencies’ assessment of management. Also, the negative association between CEO risk tolerance and credit ratings is more pronounced when management play a more important role in a firm. Overall, our study sheds light on the dark side of managerial risk tolerance by documenting its adverse impact on corporate credit ratings.
Appears in Collections: 05 Financial: Debt Market Research (Including Credit Ratings/Debt Contracts)

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