Management Tenure and the Quality of Corporate Bond Ratings

We examine the implication of management for credit rating quality by focusing on the relation between management tenure and rating quality. Using a large sample of corporate bond issues in the U.S., we find robust evidence that firms with longer-tenured CEOs have lower rating quality, as reflected in lower rating accuracy, informativeness, and timeliness. Further analyses uncover two channels that underlie this relation. One channel is through learned confidence: as CEO tenure increases, rating agencies learn about how the CEO influences firm value, which leads agencies to reduce their caution and effort in management assessment. The other channel is through developed relationships: as CEO tenure increases, rating agencies develop relationships with the CEO, which leads agencies to reduce scrutiny of or cater to the CEO and her firm. Overall, we show that management tenure has important implications for the external oversight of rating agencies.