Managerial Risk Tolerance and Corporate Credit Ratings.

Abstract

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 deteriorate credit ratings by impairing future firm value, exacerbating its volatility, and adversely influencing rating agencies' assessment about the implication of management on credit risk. Also, the negative association between CEO risk tolerance and credit ratings is more pronounced when management plays a more important role in a firm. Overall, our study sheds light on the implications of managerial risk tolerance by documenting its adverse impact on credit ratings.