TY - UNPB

T1 - Restraining Overconfident CEOs through Credit Ratings

AU - Khoo, Shee-Yee

AU - Verousis, Thanos

AU - Vu, Huong

AU - Klusak, Patrycja

PY - 2022

Y1 - 2022

N2 - Harnessing CEO overconfidence whilst exploiting their risk appetite and over-optimism has long been of interest to management scholars and firms. We find that overconfident CEOs’ reluctance to access external financing indicates that they reduce their acquisition activity at high rating levels, where the risk from a downgrade and subsequently the unobstructed access to internal financing is at its highest. We explore the mechanism via which credit ratings reduce the acquisitiveness of overconfident CEOs. When faced with downgrade risk, overconfident CEOs refocus their acquisition activities to a more conservative investment strategy that does not jeopardise their access to debt financing. Collectively, our results demonstrate that credit ratings have positive unintended consequences for the firm in the form of enhancing CEO monitoring and refocusing acquisition strategies.

AB - Harnessing CEO overconfidence whilst exploiting their risk appetite and over-optimism has long been of interest to management scholars and firms. We find that overconfident CEOs’ reluctance to access external financing indicates that they reduce their acquisition activity at high rating levels, where the risk from a downgrade and subsequently the unobstructed access to internal financing is at its highest. We explore the mechanism via which credit ratings reduce the acquisitiveness of overconfident CEOs. When faced with downgrade risk, overconfident CEOs refocus their acquisition activities to a more conservative investment strategy that does not jeopardise their access to debt financing. Collectively, our results demonstrate that credit ratings have positive unintended consequences for the firm in the form of enhancing CEO monitoring and refocusing acquisition strategies.

M3 - Working paper

BT - Restraining Overconfident CEOs through Credit Ratings

ER -