Samuel B. Bonsall

Managerial Ability and Credit Risk Assessment

Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants’ interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine CEO replacements and document that ratings increase (decrease) when CEOs are replaced with more (less) able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk.

Deciphering Tax Avoidance: Evidence from Credit Rating Disagreements

This study investigates the role of tax avoidance in the credit rating process and whether differences exist in how rating agencies account for the risk relevance of tax avoidance. Using a sample of initial credit ratings assigned to public debt issuances during the 1994-2013 period, our evidence is consistent with credit rating agencies assessing the costs and benefits associated with tax avoidance differently, resulting in more frequent and pronounced rating agency disagreement. Rating agency disagreement over tax avoidance is most prominent when it is accompanied by relatively high levels of uncertain tax positions, foreign activities, or research and development activities, as well as lower quality tax footnote disclosures. We also find evidence that changes in tax avoidance (tax footnote disclosures) are negatively (positively) associated with the convergence of split ratings, suggesting that firms can exacerbate or mitigate rating agency disagreement subsequent to bond issuance. Our study complements prior research by examining why sophisticated information intermediaries disagree about the risk relevance of tax avoidance and sheds light on how firms can impact rating agencies’ understanding of tax avoidance.

Bank Opacity and the Lending Channel of Monetary Policy Transmission

The Basel Committee on Banking Supervision has included market discipline as one of the three pillars in its new capital accord. This study looks into the existence of bank market discipline through the lending channel of monetary policy transmission. Bond and equity trading data for 84 bank holding companies from 1993 to 2003 are used to construct and correlate debt and equity-based proxies for bank opacity. These proxies for bank opacity are used to divide the sample of bank holding companies for use in a lending channel model. Using this model reveals that a lending channel does exist and more opaque banks are more sensitive to monetary contractions than more transparent ones. That opaque banks have their lending restricted more by tightening of monetary policy indicates that a tradeoff exists between promoting transparency to enhance market discipline and conducting effective monetary policy. Because of this, decision makers must determine the optimal mix of bank supervision based on market discipline and control over the money supply.