Restraining Overconfident CEOs Through Credit Ratings
Khoo, Shee‐Yee Verousis, Thanos Vu, Huong Klusak, Patrycja
Khoo, Shee‐Yee
Verousis, Thanos
Vu, Huong
Klusak, Patrycja
Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2025-11
Journal
European Financial Management
Book
Publication Volume
31
Publication Issue
5
Publication Begin page
Publication End page
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Abstract
ABSTRACT Overconfident CEOs significantly reduce their acquisition activity when facing a higher risk of a credit rating downgrade, possibly because credit ratings impact their ability to access external financing. Investment‐grade firms managed by overconfident CEOs that are placed on a negative rating outlook reduce their acquisitiveness by approximately 16 percentage points. Our findings offer a novel perspective on the role of credit rating agencies as an external control mechanism, constraining overconfident managers from pursuing value‐destroying acquisitions. Our findings survive a battery of robustness checks, including endogeneity, controlling for internal control mechanisms and market reaction tests.
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Keywords
3502 Banking, Finance and Investment, 35 Commerce, Management, Tourism and Services, 3507 Strategy, Management and Organisational Behaviour