Managerial Risk Tolerance and Corporate Credit Ratings

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.