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)
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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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