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Sovereign ceilings “lite”? The impact of sovereign ratings on corporate ratings

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  • Borensztein, Eduardo
  • Cowan, Kevin
  • Valenzuela, Patricio

Abstract

Although credit rating agencies have gradually moved away from a policy of never rating a corporation above the sovereign (the ‘sovereign ceiling’), it appears that sovereign credit ratings remain a significant determinant of corporate credit ratings. We examine this link using data for advanced and emerging economies over the period of 1995–2009. Our main result is that a sovereign ceiling continues to affect the rating of corporations. The results also suggest that the influence of a sovereign ceiling on corporate ratings remains particularly significant in countries where capital account restrictions are still in place and with high political risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 11 ()
Pages: 4014-4024

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4014-4024

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Credit risk; Sovereign risk; Credit ratings; Sovereign ceiling;

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References

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  1. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
  2. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  3. Eduardo A. Cavallo & Patricio Valenzuela, 2007. "The Determinants of Corporate Risk in Emerging Markets: An Option-Adjusted Spread Analysis," Research Department Publications 4513, Inter-American Development Bank, Research Department.
  4. Gaston Gelos & Eduardo Borensztein, 2000. "A Panic-Prone Pack? the Behavior of Emerging Market Mutual Funds," IMF Working Papers 00/198, International Monetary Fund.
  5. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
  6. Dan Covitz & Chris Downing, 2007. "Liquidity or Credit Risk? The Determinants of Very Short-Term Corporate Yield Spreads," Journal of Finance, American Finance Association, vol. 62(5), pages 2303-2328, October.
  7. Campbell, John & Taksler, Glen, 2003. "Equity Volatility and Corporate Bond Yields," Scholarly Articles 3153307, Harvard University Department of Economics.
  8. Honig, Adam, 2008. "Addressing causality in the effect of capital account liberalization on growth," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1602-1616, December.
  9. Prati, Alessandro & Schindler, Martin & Valenzuela, Patricio, 2012. "Who benefits from capital account liberalization? Evidence from firm-level credit ratings data," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1649-1673.
  10. Guillermo A. Calvo, 2005. "Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033348, December.
  11. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
  12. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  13. Williams, Gwion & Alsakka, Rasha & ap Gwilym, Owain, 2013. "The impact of sovereign rating actions on bank ratings in emerging markets," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 563-577.
  14. Ferri, Giovanni & Li-Gang Liu, 2002. "Do Global Credit Rating Agencies Think Globally? The Information Content of Firm Ratings around the World," Royal Economic Society Annual Conference 2002 74, Royal Economic Society.
  15. Juan Carlos Gozzi & Ross Levine & Maria Soledad Martinez Peria & Sergio L. Schmukler, 2012. "How Firms Use Domestic and International Corporate Bond Markets," NBER Working Papers 17763, National Bureau of Economic Research, Inc.
  16. Darren J. Kisgen & Philip E. Strahan, 2010. "Do Regulations Based on Credit Ratings Affect a Firm's Cost of Capital?," Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4324-4347, December.
  17. Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, vol. 61(3), pages 1035-1072, 06.
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Cited by:
  1. Gwion Williams & Rasha Alsakka & Owain ap Gwilym, 2013. "The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis," Working Papers 13007, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  2. Monica Dudian, 2009. "Credit Risk Assessment By Rating Agencies: Standardization Versus Subjectivity," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 4(4), pages 52-65, december.
  3. Fuchs , Andreas & Gehring , Kai, 2013. "The Home Bias in Sovereign Ratings," Working Papers 0552, University of Heidelberg, Department of Economics.

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