Management team categories, social network characteristics, and corporate credit risk

Abstract

We investigate the association between the social networks of management team (AMT) and corporate credit risk using American corporate bond market data. We find that the social network size of AMT is significantly and positively related to corporate bond yield spreads, consistent with the risk-taking mechanism. In addition, the relative social networks of AMT to CEO and subordinate executives to CEO are significantly and positively related to bond yield spreads while that of middle managers to CEO have the opposite association. This implies that relatively greater social networks of subordinate executives could potentially influence the CEO to undertake greater risks, whereas relatively greater social networks of middle managers reduce corporate credit risk mainly through the information-sharing mechanism rather than the risk-taking effect since MM has no direct decision-making authority. Moreover, the variations in social networks among AMT are positively associated with corporate bond yield spreads, suggesting that an inequitable distribution of power among AMT members increases corporate credit risk. Additionally, we find that non-invesment-grade bonds, managerial entrenchment, information asymmetry, and overinvestment all intensify the positive association between AMT social networks and credit risk, namely enhancing the bondholders’ perceptions about the risk-taking mechanism of AMT social networks. Finally, our findings are robust after considering endogeneity concerns and alternative model settings.