We use a sample of 86 counties to examine the cross-sectional determinants of sovereign credit ratings. We find that the quality of a country's legal and political institutions plays a vital role in determining these ratings. A one-standard-deviation increase in our legal environment index results in an average credit rating increase of 0.466 standard deviations, even when we control for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Although part of this effect is due to the legal environment’s endogeneity, its relative importance is robust to endogeneity concerns.
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Article provided by Financial Management Association in its journal Financial Management.
Volume (Year): 35 (2006) Issue (Month): 3 (Autumn) Pages: Download reference. The following formats are available: HTML,
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Handle: RePEc:fma:fmanag:butlerfauver06
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António Afonso & Pedro Gomes & Philipp Rother, 2006.
"What “Hides” Behind Sovereign Debt Ratings?,"
Working Papers
2006/35, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon..
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