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Review of Quantitative Finance and Accounting

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23.12.2017 | Original Research

Managerial ability, information quality, and the design and pricing of corporate debt

verfasst von: Alex Petkevich, Andrew Prevost

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2018

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Abstract

We examine if managerial ability affects the efficiency of the contracting environment with lenders. We find that higher ability alters the balance of information-sensitive covenants demanded by outside investors, increases the issuance of bonds with longer maturity, and decreases the issuance of senior secured debt. We also document higher ability reduces the risk premium demanded by investors on information-sensitive debt. These results are collectively consistent with the premise that the mitigation of information risk is an important dimension of managerial ability that has a direct bearing on the structure and pricing of corporate debt.

Vorheriger Artikel Managerial ability and firm risk-taking behavior

Nächster Artikel An analysis of proxy statement leadership structure justification disclosures

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We obtain the PIN measure from Stephen Brown’s website, at http://scholar.rhsmith.umd.edu/sbrown/pin-data. The measure is available for the 1993–2010 period.

We obtain the MA-Score measure from Sarah McVay’s website, at http://faculty.washington.edu/smcvay/abilitydata.html.

We also examine if the MA-Score matters more in industries that are more competitive and where managers have less control over pricing power. We segment the sample into more and less competitive industries using the standard Herfindahl–Hirschman Index and, alternatively, the historical fitted SIC-based HHI measure provided by Gerard Hoberg and Gordon Phillips and used by Hoberg and Phillips (2010). Hoberg and Phillips (2010) use the fitted HHI index to assess competitive and concentrated industries and is the predicted level of industry concentration based on three-digit SIC codes using data from the Department of Commerce manufacturing HHI data, Bureau of Labor Statistics employee data and Compustat sales data. Finally, we use the TNIC HHI provided by the same authors. The TNIC HHI is based on 10-K product descriptions and uses time-varying measures of product similarity to measure how firms differ from their competitors. In untabulated results, the negative MA-Score coefficient intensifies in relatively competitive environments using these three measures and has a greater cross-sectional effect on the yield spreads of information sensitive debt. We thank an anonymous reviewer for pointing out this possibility.

We estimate this model with the Stata user-written routine FRACGLM, written by Richard Williams. See Papke and Wooldridge (2008) for more information.

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Titel: Managerial ability, information quality, and the design and pricing of corporate debt
verfasst von: Alex Petkevich
Andrew Prevost
Publikationsdatum: 23.12.2017
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2018
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-017-0696-z

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