Foreign asset expropriation and sovereign bond ratings in the developing world

Research shows that foreign asset expropriation narrows long-term bond spreads, resulting in lower borrowing costs. However, no empirical studies have investigated the effects of expropriation on sovereign bond ratings. Bondholders and sovereign bond issuers track ratings by credit rating agencies because they impact interest rates and capital costs. Using up to 59 developing countries from 1996 to 2016, we find that expropriation signals lower bond repayment, as asset confiscation blatantly violates international rule of law and discourages foreign direct investment (FDI) inflows, reducing bond ratings. Mediation analysis also indicates that FDI and the rule of law mediate the relationship between expropriation and bond ratings. Further, we distinguish between direct and indirect expropriation and observe that direct expropriation has a greater probability of decreasing ratings. Our research suggests that expropriation holds economic consequences for developing countries, indicating how expropriation negatively affects sovereign bond issuers in the financial and investment community.