Proximity to broad bond rating change and employee performance

Abstract

PurposeThe purpose of this paper is to investigate the employee performance of firms with a plus or minus specification in their bond credit ratings (i.e. firms near a broad bond rating change) because prior research suggests that these borderline firms demonstrate different behavior, relative to firms that are not near a broad bond rating change.Design/methodology/approachThe authors use regression analysis to test the research question.FindingsThe authors posit and find that employees work harder when their firms are borderline in the context of bond credit ratings. The authors obtain similar results using firms on the Standard and Poor’s CreditWatch list. The authors also find that the results become stronger for firms with higher ability managers or when firms are faced with a more volatile business environment.Originality/valueThe results suggest that managers of these borderline firms have stronger incentives to improve employee performance. The study contributes to the large research stream on bond rating in finance literature and the research stream on employee performance in management and accounting literature. Specifically, our findings not only strengthen the notion in Kisgen (2006) that borderline companies often show different behavior, compared to average companies, but also can lead to a more comprehensive understanding of the determinants of employee performance. The study, to the authors’ knowledge, is one of the few empirical studies that directly examine the employee behavior (i.e. performance) when their firms are at the borderline in the context of bond credit ratings.