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Institutional Environment and Sovereign Credit Ratings

  • Alexander W. Butler
  • Larry Fauver

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. Copyright (c) 2006 Financial Management Association International.

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Article provided by Financial Management Association International in its journal Financial Management.

Volume (Year): 35 (2006)
Issue (Month): 3 (09)
Pages: 53-79

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Handle: RePEc:bla:finmgt:v:35:y:2006:i:3:p:53-79
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  1. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Does Financial Liberalization Spur Growth?," Working Paper Research 53, National Bank of Belgium.
  2. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
  3. Stulz, Rene M. & Williamson, Rohan, 2003. "Culture, openness, and finance," Journal of Financial Economics, Elsevier, vol. 70(3), pages 313-349, December.
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  6. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "Serial Default and the "Paradox" of Rich to Poor Capital Flows," NBER Working Papers 10296, National Bureau of Economic Research, Inc.
  8. Shleifer, Andrei & Wolfenzon, Daniel, 2002. "Investor protection and equity markets," Journal of Financial Economics, Elsevier, vol. 66(1), pages 3-27, October.
  9. repec:tpr:qjecon:v:112:y:1997:i:4:p:1203-50 is not listed on IDEAS
  10. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-79, April.
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  12. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
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