Managerial Overconfidence and Corporate Credit Ratings

Abstract

This paper examines how managerial overconfidence affects firms' credit ratings. Unlike the existing literature concentrating on CEO optimism, this paper measures the overconfidence of all top executives from their options holding decisions and the overprediction of Earnings-per-Share (EPS) in self-reported guidance. Using a panel data on S&P 1500 index constituent firms from 1992 to 2016, I find that the overconfidence level of both individual executives (CEOs, CFOs and other executives) and the entire management team negatively influence credit ratings. Moreover, I show that managerial overconfidence limits the positive effect of profitability on the creditworthiness, and different proxies have different implications on ratings received by investment-grade firms and speculative-grade firms. The findings highlight the importance of managerial “soft” information in Credit Rating Agencies (CRAs)' decision making process.