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Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings

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  • Eduardo Borensztein
  • Kevin Cowan
  • Patricio Valenzuela

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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. This effect is robust to a broad range of alternative specifications.

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Bibliographic Info

Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 299.

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Date of creation: 2013
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Handle: RePEc:edj:ceauch:299

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  1. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 37-53.
  2. 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.
  3. Gozzi, Juan Carlos & Levine, Ross & Peria, Maria Soledad Martinez & Schmukler, Sergio L., 2012. "How firms use domestic and international corporate bond markets," Policy Research Working Paper Series 6209, The World Bank.
  4. 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.
  5. Reinhart, Carmen, 2002. "Sovereign Credit Ratings Before and After Financial Crises," MPRA Paper 7410, University Library of Munich, Germany.
  6. 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.
  7. Eduardo A. Cavallo & Patricio Valenzuela, 2010. "The determinants of corporate risk in emerging markets: an option-adjusted spread analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 59-74.
  8. 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.
  9. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc.
  10. 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.
  11. Eduardo Borensztein & R. Gaston Gelos, 2003. "A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 3.
  12. Roberto Rigobon, 2001. "Contagion: How to Measure It?," NBER Working Papers 8118, National Bureau of Economic Research, Inc.
  13. Durbin, Erik & Ng, David T.C., 2002. "The Sovereign Ceiling and Emerging Market Corporate Bond Spreads," Working Papers 127286, Cornell University, Department of Applied Economics and Management.
  14. Darren J. Kisgen, 2006. "Credit Ratings and Capital Structure," Journal of Finance, American Finance Association, vol. 61(3), pages 1035-1072, 06.
  15. 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.
  16. 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.
  17. 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.
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Cited by:
  1. Fuchs , Andreas & Gehring , Kai, 2013. "The Home Bias in Sovereign Ratings," Working Papers 0552, University of Heidelberg, Department of Economics.
  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. 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).

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