Proximity to broad bond rating change and CEO power

PurposeBorderline firms whose bond rating has a plus or minus specification by a rating agency face a greater potential for an upgrade or downgrade by the agency. The authors examine the level of chief executive officer (CEO) power in firms with a plus or minus bond rating. The authors test whether CEOs of these firms become more or less powerful, along with the effect of corporate governance and existing bond rating.Design/methodology/approachThe authors use a panel sample with 16,429 observations from 1992 to 2016 from the ExecuComp database.FindingsThe authors find that CEOs of borderline-rated firms tend to be less powerful, relative to firms with a non-proximate rating. This result is largely present in firms with a plus rating. The authors also find that our primary findings are mainly driven by firms with low bond ratings (i.e. below investment grade) or by firms with weak corporate governance. Lastly, the authors document that CEO personal characteristics (i.e. CEO age, gender and tenure) impact our findings.Research limitations/implicationsFirst, firms in our sample are large public companies, and the external validity of our results to smaller firms that may also be private is unknown. Second, the Compustat database discontinued reporting bond rating data (i.e. S&P bond ratings) in 2017. Hence, the authors are unable to analyze the CEO power of borderline firms in years after 2016.Practical implicationsThe study contributes to the larger debate on whether having powerful CEOs is beneficial to an organization or not, because prior research has examined the consequences of CEO power with mixed results. The authors document evidence to support the research stream that links CEO power to negative consequences.Social implicationsThe authors find that our primary results are enhanced in firms with weak corporate governance, which is consistent with prior research that finds effective governance may mitigate CEO power and agency problems between the CEO and the Board.Originality/valuePrior research primarily uses CEO power as a driver for performance. Our study focuses on CEO power as a dependent variable, with the bond rating change proximity as a driver of CEO power. The authors believe that this helps develop a more comprehensive understanding of CEO power.

Proximity to broad bond rating change and annual report readability

PurposeThe purpose of this study is to examine the impact of proximity to broad bond rating change on annual report reading difficulty.Design/methodology/approachWe use regression analysis to examine the association between proximity to broad bond rating change and reading difficulty of annual report.FindingsUsing a large panel sample with 11,767 firm-year observations representing 1,474 unique US companies from 1994 to 2016, we find a significant positive relation between proximity to broad bond rating change and annual report reading difficulty, which suggests that the annual reports of borderline firms are difficult for stakeholders to read and understand.Originality/valueBy investigating whether and how borderline firms manipulate readability of annual reports, our study contributes to bond rating research in finance literature and disclosure quality research in accounting literature. To the best of our knowledge, this study is perhaps the first empirical study that directly tests the link between proximity to broad bond rating change and annual report readability. In particular, the majority of prior studies concentrate on the economic consequences of annual report readability, but few studies investigate the determinants of readability. Therefore, examining the impact of proximity to broad bond rating change on readability contributes to a more comprehensive understanding of annual report readability.

Rating change classication of insurance companies indicators

In this paper we investigate the relationship between financial indicators of insurance companies and news space. The news space is considered as a set of topics. The goal of the paper is to fit the model in order to forecast company's rating change for given indicators — whether rating will go up or down regarding the current value. As the data set we use news articles of the relevant insurance topics for the specified time period. The approach we use includes search for the most influential topics for the given indicator. To retrieve topics, we used Latent Dirichlet Allocation (LDA) algorithm and Naive Bayes model. For the validation the Leave-One-Out approach was used with accuracy metric.

Proximity to broad bond rating change and employee performance

Purpose The purpose of this paper is to investigate the employee performance of firms with a plus or minus specification in their bond credit ratings (i.e. firms near a broad bond rating change) because prior research suggests that these borderline firms demonstrate different behavior, relative to firms that are not near a broad bond rating change. Design/methodology/approach The authors use regression analysis to test the research question. Findings The authors posit and find that employees work harder when their firms are borderline in the context of bond credit ratings. The authors obtain similar results using firms on the Standard and Poor’s CreditWatch list. The authors also find that the results become stronger for firms with higher ability managers or when firms are faced with a more volatile business environment. Originality/value The results suggest that managers of these borderline firms have stronger incentives to improve employee performance. The study contributes to the large research stream on bond rating in finance literature and the research stream on employee performance in management and accounting literature. Specifically, our findings not only strengthen the notion in Kisgen (2006) that borderline companies often show different behavior, compared to average companies, but also can lead to a more comprehensive understanding of the determinants of employee performance. The study, to the authors’ knowledge, is one of the few empirical studies that directly examine the employee behavior (i.e. performance) when their firms are at the borderline in the context of bond credit ratings.

On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek’s stochastic process. Calibration of the model parameters and some numerical calculations are shown.