Managerial Ability and Bond Rating: A Focus on Controlling Shareholders' Ownership Structure

Abstract

Although managerial ability is important for credit risk assessment, it is unclear whether local credit rating agencies consider it an independent risk factor. We examine how Korean agencies evaluate the impact of managerial ability on bond rating depending on controlling shareholders' ownership structure. We identify controlling shareholders using family-owned businesses (chaebols). The results show that the positive effect of managerial ability on bond rating is diminished in chaebol firms, especially those with a high control-ownership wedge, compared to non-chaebol firms. These findings suggest that managerial ability carries higher weight in the rating process for firms with better ownership structure.