Director networks and credit ratings of insurance companies

Abstract

Previous finance literature has found that a firm's credit rating is influenced by the connectedness of its board members. Due to the subjective nature of credit ratings, qualitative information like a board's connections can influence a rating agency's decision making. We investigate the impact of four dimensions of board connectedness on credit ratings in the highly-regulated insurance industry. We find mixed evidence regarding the relationship between board connectedness and credit ratings in the insurance industry. As is the case for non-financial companies, we find some evidence that board connectedness is positively related to credit ratings for property/casualty (P/C) insurers, in line with social capital theory. However, for life insurers, we find that board connectedness is negatively associated with credit ratings, which supports the "board-busyness" theory. We suggest that the differing relationships between board connectedness and credit ratings among insurers are due to the short-term and riskier nature of property insurers, and that the disconnect between life insurers and non-financial companies is explained by life insurers' greater size, lower liquidity and higher leverage.