CEO political preference and credit ratings

Abstract

This study investigates whether a CEO's personal political ideology, as captured by his or her political contributions, is associated with a firm's credit ratings. Republican CEOs, we find, are associated with higher credit ratings, especially when their firms are headquartered in conservative areas. In addition, the link between political ideology and credit rating is more pronounced in firms that exhibit high financial distress or weak corporate governance. Changes in political ideology are associated with changes in credit rating. Our results support the behavior consistency, upper echelon, and social identity theories, as well as the risk acceptance hypothesis, and are robust to a number of alternative specifications as well as when alternate approaches and measures of credit risk are introduced. Using Republican CEOs as a proxy for conservative CEOs, our evidence implies that credit rating agencies justifiably view a CEO's political ideology and conservatism as indicative of corporate policies and, therefore, as an important determinant of the firm's credit ratings.

Publication Title

Journal of Corporate Finance

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