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How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?

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Author Info

  • Giovanni Ferri

    (Professor, Department of Economics University of Bari Via C. Rosalba, 53 70124 Bari Italy)

  • Li-Gang Liu

    (Assistant Professor of Public Policy School of Public Policy George Mason University 3401 North Fairfax Drive, MS 3B1 Arlington, VA 22201 USA)

Abstract

This paper examines the information content of firm ratings. We disentangle the relative contribution to firms' ratings of sovereign risks and of the individual firms' performance indicators employed by rating agencies. We reach three conclusions. First, the contribution of sovereign risk to firm ratings is high in developing countries but is negligible in developed countries. Second, even after controlling for the "country ceiling effect" (i.e., the constraint put on the private firms' rating by the rating of the country in which the firms operate), the information content of ratings for firms in developing countries is much smaller than for firms in developed countries. Third, cross-country indicators of information quality help explain these discrepancies, but they do not entirely account for them. Copyright (c) 2004 The Earth Institute at Columbia University and the Massachusetts.

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Bibliographic Info

Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 2 (2003)
Issue (Month): 3 ()
Pages: 30-56

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Handle: RePEc:tpr:asiaec:v:2:y:2003:i:3:p:30-56

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References

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  1. 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.
  2. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
  3. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  4. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
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Cited by:
  1. Marwan Elkhoury, 2007. "Credit Rating Agencies And Their Potential Impact On Developing Countries," UNCTAD Discussion Papers 186, United Nations Conference on Trade and Development.
  2. Marcus Noland, 2005. "Popular Attitudes, Globalization and Risk," International Finance, Wiley Blackwell, vol. 8(2), pages 199-229, 08.
  3. Giovanni Ferri, 2004. "More analysts, better ratings: Do rating agencies invest enough in less developed countries?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 77-98, May.
  4. Ratha, Dilip & De, Prabal & Mohapatra, Sanket, 2007. "Shadow sovereign ratings for unrated developing countries," Policy Research Working Paper Series 4269, The World Bank.
  5. Yun Jung Kim & Jing Zhang, 2010. "Decentralized Borrowing and Centralized Default," Working Papers 596, Research Seminar in International Economics, University of Michigan.
  6. José E. Gómez-González & Nicholas M. Kiefer., 2009. "Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 46(133), pages 33-50.
  7. Rosemarie Bröker Bone & Eduardo P Ribeiro, 2013. "Informational content of corporate ratings in a developing country: the case of Brazilian firms," Economics Bulletin, AccessEcon, vol. 33(1), pages 35-45.
  8. Giovanni Ferri & Li-gang Liu, 2005. "Assessing the effort of rating agencies in emerging economies: Some empirical evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 11(3), pages 283-295.
  9. Guttler, Andre & Wahrenburg, Mark, 2007. "The adjustment of credit ratings in advance of defaults," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 751-767, March.

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