IDEAS home Printed from https://ideas.repec.org/a/eee/jbrese/v102y2019icp191-200.html
   My bibliography  Save this article

Country and industry effects in corporate bond spreads in emerging markets

Author

Listed:
  • Garay, Urbi
  • González, Maximiliano
  • Rosso, John

Abstract

We use corporate bond data from firms belonging to 13 emerging markets and eight industries from 2007 to 2013 to study whether and how country and industry effects determine the spread between their yield and the respective sovereign debt yield. Existing models ignore country and industry effects as they implicitly assume that firm, bond issues, local, and global factors capture these effects. We find that country and, especially, industry effects are significant in explaining corporate bond spreads. From a practitioner's point of view, our results are important as ignoring country and industry effects causes bonds to be mispriced in emerging markets, particularly in the energy, basic materials, and communications and technology sectors. We also find country effects for bonds from firms from Chile, Indonesia, and the Philippines, although with lower significance levels. Finally, and consistent with other recent papers, we also find violations of the sovereign ceiling rule.

Suggested Citation

  • Garay, Urbi & González, Maximiliano & Rosso, John, 2019. "Country and industry effects in corporate bond spreads in emerging markets," Journal of Business Research, Elsevier, vol. 102(C), pages 191-200.
    • Handle: RePEc:eee:jbrese:v:102:y:2019:i:c:p:191-200
    DOI: 10.1016/j.jbusres.2017.09.021
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0148296317303399
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbusres.2017.09.021?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ugo Panizza & Federico Sturzenegger & Jeromin Zettelmeyer, 2009. "The Economics and Law of Sovereign Debt and Default," Journal of Economic Literature, American Economic Association, vol. 47(3), pages 651-698, September.
    2. Graciela Kaminsky & Sergio L. Schmukler, 2002. "Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?," The World Bank Economic Review, World Bank, vol. 16(2), pages 171-195, August.
    3. Gabriel Cuadra & Juan Sanchez & Horacio Sapriza, 2010. "Fiscal Policy and Default Risk in Emerging Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 452-469, April.
    4. Durbin, Erik & Ng, David, 2005. "The sovereign ceiling and emerging market corporate bond spreads," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 631-649, June.
    5. Greene, William, 2011. "Fixed Effects Vector Decomposition: A Magical Solution to the Problem of Time-Invariant Variables in Fixed Effects Models?," Political Analysis, Cambridge University Press, vol. 19(2), pages 135-146, April.
    6. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    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. Y. Bai, 2014. "Country factors in stock returns: reconsidering the basic method," Applied Financial Economics, Taylor & Francis Journals, vol. 24(13), pages 871-888, July.
    9. Rachel Christopher & Suk-Joong Kim & Eliza Wu, 2018. "Do Sovereign Credit Ratings Influence Regional Stock and Bond Market Interdependencies in Emerging Countries?," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 15, pages 517-546, World Scientific Publishing Co. Pte. Ltd..
    10. Borensztein, Eduardo & Cowan, Kevin & Valenzuela, Patricio, 2013. "Sovereign ceilings “lite”? The impact of sovereign ratings on corporate ratings," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4014-4024.
    11. Caballero, Julián & Fernández, Andrés & Park, Jongho, 2019. "On corporate borrowing, credit spreads and economic activity in emerging economies: An empirical investigation," Journal of International Economics, Elsevier, vol. 118(C), pages 160-178.
    12. Monika Piazzesi & John Cochrane, 2009. "Decomposing the Yield Curve," 2009 Meeting Papers 18, Society for Economic Dynamics.
    13. Alberto Alesina, 2002. "The Size of Countries: Does it Matter?," Harvard Institute of Economic Research Working Papers 1975, Harvard - Institute of Economic Research.
    14. Oya Celasun & Philipp Harms, 2011. "Boon Or Burden? The Effect Of Private Sector Debt On The Risk Of Sovereign Default In Developing Countries," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 70-88, January.
    15. Eli M. Remolona & Michela Scatigna & Eliza Wu, 2008. "A ratings-based approach to measuring sovereign risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 26-39.
    16. Mr. Marcel Peter & Martín Grandes, 2005. "How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa," IMF Working Papers 2005/217, International Monetary Fund.
    17. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
    18. Emanuele Baldacci & Sanjeev Gupta & Amine Mati, 2011. "Political and Fiscal Risk Determinants of Sovereign Spreads in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 15(2), pages 251-263, May.
    19. Jens Hilscher & Yves Nosbusch, 2010. "Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt," Review of Finance, European Finance Association, vol. 14(2), pages 235-262.
    20. Meng-Horng Lee & Chee-Wooi Hooy, 2013. "Country Versus Industry Diversification in ASEAN-5," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(2), pages 44-63, March.
    21. Hsueh, L. Paul & Liu, Y. Angela, 1992. "Market anticipation and the effect of bond rating changes on common stock prices," Journal of Business Research, Elsevier, vol. 24(3), pages 225-239, May.
    22. Gianluigi Ferrucci, 2003. "Empirical determinants of emerging market economies' sovereign bond spreads," Bank of England working papers 205, Bank of England.
    23. Miguel Almeida Ferreira & Miguel Ângelo Ferreira, 2006. "The Importance of Industry and Country Effects in the EMU Equity Markets," European Financial Management, European Financial Management Association, vol. 12(3), pages 341-373, June.
    24. Iva Petrova & Mr. Michael G. Papaioannou & Mr. Dimitri Bellas, 2010. "Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals vs Financial Stress," IMF Working Papers 2010/281, International Monetary Fund.
    25. Krylova, Elizaveta, 2016. "Determinants of euro-denominated corporate bond spreads," Working Paper Series 1912, European Central Bank.
    26. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    27. Hull, John & Predescu, Mirela & White, Alan, 2004. "The relationship between credit default swap spreads, bond yields, and credit rating announcements," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2789-2811, November.
    28. Ağca, Şenay & Celasun, Oya, 2012. "Sovereign debt and corporate borrowing costs in emerging markets," Journal of International Economics, Elsevier, vol. 88(1), pages 198-208.
    29. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, vol. 90(1), pages 17-32.
    30. Baek, In-Mee & Bandopadhyaya, Arindam & Du, Chan, 2005. "Determinants of market-assessed sovereign risk: Economic fundamentals or market risk appetite?," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 533-548, June.
    31. Alberto Alesina, 2003. "Joseph Schumpeter Lecture: The Size of Countries: Does it Matter?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 301-316, 04/05.
    32. King, Tao-Hsien Dolly & Khang, Kenneth, 2005. "On the importance of systematic risk factors in explaining the cross-section of corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3141-3158, December.
    33. Julián Caballero & Andres Fernandez & Jongho Park, 2016. "On Corporate Borrowing, Credit Spreads and Economic Activity in Emerging Economies: An Empirical Investigation," IDB Publications (Working Papers) 95296, Inter-American Development Bank.
    34. Garay, Urbi & Molina, Carlos A., 2014. "The public bond offering of Petróleos de Venezuela S.A," Journal of Business Research, Elsevier, vol. 67(4), pages 582-590.
    35. Miguel A. Segoviano & Carlos Caceres & Vincenzo Guzzo, 2010. "Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals?," IMF Working Papers 2010/120, International Monetary Fund.
    36. Martinez, Lisana B. & Terceño, Antonio & Teruel, Mercedes, 2013. "Sovereign bond spreads determinants in Latin American countries: Before and during the XXI financial crisis," Emerging Markets Review, Elsevier, vol. 17(C), pages 60-75.
    37. Richard Cantor & Frank Packer, 1996. "Determinants and impact of sovereign credit ratings," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Oct), pages 37-53.
    38. Bai, Ye & Green, Christopher J. & Leger, Lawrence, 2012. "Industry and country factors in emerging market returns: Did the Asian crisis make a difference?," Emerging Markets Review, Elsevier, vol. 13(4), pages 559-580.
    39. Feyen,Erik H.B. & Ghosh,Swati R. & Kibuuka,Katie & Farazi,Subika, 2015. "Global liquidity and external bond issuance in emerging markets and developing economies," Policy Research Working Paper Series 7363, The World Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Machokoto, Michael & Areneke, Geofry & Ibrahim, Boulis Maher, 2020. "Rising corporate debt and value relevance of supply-side factors in South Africa," Journal of Business Research, Elsevier, vol. 109(C), pages 26-37.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Serhan Cevik & Belma Öztürkkal, 2021. "Contagion of fear: Is the impact of COVID‐19 on sovereign risk really indiscriminate?," International Finance, Wiley Blackwell, vol. 24(2), pages 134-154, August.
    2. Hajer Dachraoui & Mounir Smida & Maamar Sebri, 2020. "Role of capital flight as a driver of sovereign bond spreads in Latin American countries," International Economics, CEPII research center, issue 162, pages 15-33.
    3. Bernal, Oscar & Girard, Alexandre & Gnabo, Jean-Yves, 2016. "The importance of conflicts of interest in attributing sovereign credit ratings," International Review of Law and Economics, Elsevier, vol. 47(C), pages 48-66.
    4. Cayirli, Omer & Aktas, Huseyin & Kayalidere, Koray, 2022. "A closer look into the behavior of emerging market sovereign spreads: State-dependent and asymmetric behaviors," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 522-548.
    5. Chuku Chuku & Alexandre Kopoin, 2022. "Working Paper 367 - Debt Distress and Recovery Episodes in Africa: Good Policy or Good Luck?," Working Paper Series 2493, African Development Bank.
    6. Flores Zendejas, Juan, 2015. "Capital Markets and Sovereign Defaults: A Historical Perspective," Working Papers unige:73325, University of Geneva, Paul Bairoch Institute of Economic History.
    7. Bevilaqua, Julia & Hale, Galina B. & Tallman, Eric, 2020. "Corporate yields and sovereign yields," Journal of International Economics, Elsevier, vol. 124(C).
    8. Yu-Li Huang & Chung-Hua Shen, 2015. "The Sovereign Effect on Bank Credit Ratings," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(3), pages 341-379, June.
    9. Inci Gumus, 2016. "The Relationship Between Sovereign Spreads and International Reserves: Does the Exchange Rate Regime Matter?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(3), pages 658-673, March.
    10. P. Hammer & A. Kogan & M. Lejeune, 2011. "Reverse-engineering country risk ratings: a combinatorial non-recursive model," Annals of Operations Research, Springer, vol. 188(1), pages 185-213, August.
    11. Michael Bleaney & Veronica Veleanu, 2017. "Currency risk in corporate bond spreads in the eurozone," Discussion Papers 2017/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    12. Nidhaleddine Ben Cheikh & Oussama Ben Hmiden & Younes Ben Zaied & Sabri Boubaker, 2021. "Do sovereign credit ratings matter for corporate credit ratings?," Annals of Operations Research, Springer, vol. 297(1), pages 77-114, February.
    13. Wang, Alan T. & Yang, Sheng-Yung & Yang, Nien-Tzu, 2013. "Information transmission between sovereign debt CDS and other financial factors – The case of Latin America," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 586-601.
    14. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the effect of government ESG performance on sovereign borrowing cost," CIRANO Working Papers 2014s-37, CIRANO.
    15. Ratha, Dilip & De, Supriyo & Kurlat, Sergio, 2018. "Does governing law affect bond spreads?," Emerging Markets Review, Elsevier, vol. 36(C), pages 60-78.
    16. Jane Mpapalika & Christopher Malikane, 2019. "The Determinants of Sovereign Risk Premium in African Countries," JRFM, MDPI, vol. 12(1), pages 1-20, February.
    17. Jaramillo, Laura & Weber, Anke, 2013. "Bond yields in emerging economies: It matters what state you are in," Emerging Markets Review, Elsevier, vol. 17(C), pages 169-185.
    18. Audzeyeva, Alena & Fuertes, Ana-Maria, 2018. "On the predictability of emerging market sovereign credit spreads," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 140-157.
    19. Fuchs , Andreas & Gehring , Kai, 2013. "The Home Bias in Sovereign Ratings," Working Papers 0552, University of Heidelberg, Department of Economics.
    20. Bedendo, Mascia & Colla, Paolo, 2015. "Sovereign and corporate credit risk: Evidence from the Eurozone," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 34-52.

    More about this item

    Keywords

    Emerging markets; Corporate debt; Sovereign debt; Country and industry effects;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbrese:v:102:y:2019:i:c:p:191-200. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbusres .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.