Sovereign credit ratings, fiscal burden and corporate investment policies: An international evidence

This study examines how changes in sovereign credit ratings influence corporate investment decisions, with a particular emphasis on the moderating role of public debt burdens. Using a panel of 2213 rated firms across 52 countries from 1995 to 2021, we document an asymmetric effect: sovereign downgrades lead to a significant 20.5 % reduction in total investment, primarily driven by sharp declines in long-term capital expenditures and a reallocation toward short-term investments. By contrast, rating upgrades have no meaningful effect on investment, highlighting that rating shocks are more disruptive in the downward direction. Our results suggest that rising borrowing costs and heightened financial constraints are key channels through which sovereign risk spills over to firms, with the adverse effects of downgrades further amplified in high-debt countries. Our results are robust across alternative investment proxies, subsample analyses, and endogeneity controls, and are reinforced by additional sectoral and institutional heterogeneity tests, highlighting both the pervasiveness of the downgrade effect and the capacity of strong governance environments to mitigate its impact.