IDEAS home Printed from https://ideas.repec.org/a/eme/jfeppp/v2y2010i2p149-162.html
   My bibliography  Save this article

Economic freedom and sovereign credit ratings and default risk

Author

Listed:
  • Saurav Roychoudhury
  • Robert A. Lawson

Abstract

Purpose - The purpose of this paper is to show that economic policy impacts sovereign debt risk in addition to economic performance. Design/methodology/approach - Regression analysis was employed to determine the factors that contribute to sovereign bond ratings and bond spreads for a sample of 93 countries from 2000 to 2006. Findings - After controlling for common factors like per capita gross domestic production, growth, and political regime, the results suggest that a two unit (or a 2.4 standard deviation) drop in the economic freedom index represents approximately a 50 percent higher cost of borrowing for a country. Originality/value - The paper contributes to the empirical literature on sovereign credit risk by identifying factors found to be the most significant in determining sovereign credit ratings and bond spreads.

Suggested Citation

  • Saurav Roychoudhury & Robert A. Lawson, 2010. "Economic freedom and sovereign credit ratings and default risk," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 2(2), pages 149-162, June.
    • Handle: RePEc:eme:jfeppp:v:2:y:2010:i:2:p:149-162
    DOI: 10.1108/17576381011070201
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/17576381011070201/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/17576381011070201/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/17576381011070201?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. 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.
    2. Jakob De Haan & Susanna Lundström & Jan‐Egbert Sturm, 2006. "Market‐oriented institutions and policies and economic growth: A critical survey," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 157-191, April.
    3. Marshall L. Stocker, 2005. "Equity Returns And Economic Freedom," Cato Journal, Cato Journal, Cato Institute, vol. 25(3), pages 583-594, Fall.
    4. Alexander W. Butler & Larry Fauver, 2006. "Institutional Environment and Sovereign Credit Ratings," Financial Management, Financial Management Association International, vol. 35(3), pages 53-79, September.
    5. Gwartney, James & Lawson, Robert, 2003. "The concept and measurement of economic freedom," European Journal of Political Economy, Elsevier, vol. 19(3), pages 405-430, September.
    6. James D. Gwartney & Randall G. Holcombe & Robert A. Lawson, 2006. "Institutions and the Impact of Investment on Growth," Kyklos, Wiley Blackwell, vol. 59(2), pages 255-273, May.
    7. Roman Kraeussl, "undated". "Do Changes in Sovereign Credit Ratings Contribute to Financial Contagion in Emerging Market Crises?," Working Papers 0314, University of Crete, Department of Economics.
    8. Berggren, Niclas, 2003. "The Benefits of Economic Freedom: A Survey," Ratio Working Papers 4, The Ratio Institute.
    9. Joshua Hall & Robert Lawson, 2009. "Economic Freedom and Peace," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 37(4), pages 445-446, December.
    10. 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.
    11. Brooks, Robert & Faff, Robert W. & Hillier, David & Hillier, Joseph, 2004. "The national market impact of sovereign rating changes," Journal of Banking & Finance, Elsevier, vol. 28(1), pages 233-250, January.
    12. Robert A. Lawson, 2006. "On Testing the Connection Between Economic Freedom and Growth," Econ Journal Watch, Econ Journal Watch, vol. 3(3), pages 398-406, September.
    13. D'Souza, Juliet & Megginson, William & Nash, Robert, 2005. "Effect of institutional and firm-specific characteristics on post-privatization performance: Evidence from developed countries," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 747-766, October.
    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. ABBAS Faisal, 2021. "Impact Of Investment, Financial And Trade Freedom On Bank’S Risk-Taking," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 16(3), pages 5-23, December.
    2. Sang-Heui Lee & Jay Wyk, 2015. "National institutions and logistic performance: a path analysis," Service Business, Springer;Pan-Pacific Business Association, vol. 9(4), pages 733-747, December.
    3. Stocker, Marshall L., 2016. "The price of freedom: Idiosyncratic currency devaluations," Research in International Business and Finance, Elsevier, vol. 38(C), pages 312-325.
    4. Dang, Huong & Partington, Graham, 2020. "Sovereign ratings and national culture," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    5. Daniel M. Gropper, Robert A. Lawson, and Jere T. Thorne Jr., 2011. "Economic Freedom and Happiness," Cato Journal, Cato Journal, Cato Institute, vol. 31(2), pages 237-255, Spring/Su.
    6. Lin, Kun-Li & Doan, Anh Tuan & Doong, Shuh-Chyi, 2016. "Changes in ownership structure and bank efficiency in Asian developing countries: The role of financial freedom," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 19-34.
    7. Asteriou, Dimitrios & Pilbeam, Keith & Tomuleasa, Iuliana, 2021. "The impact of corruption, economic freedom, regulation and transparency on bank profitability and bank stability: Evidence from the Eurozone area," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 150-177.
    8. Blau, Benjamin M. & Brough, Tyler J. & Thomas, Diana W., 2014. "Economic freedom and the stability of stock prices: A cross-country analysis," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 182-196.
    9. Muhammad Hussain & Farzan Yahya & Muhammad Waqas, 2021. "Does strong governance stimulate the effect of economic freedom and financial literacy on financial inclusion? a cross-country evidence," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    10. Chowdhury, M. Ashraful Ferdous & Haque, M. Mahmudul & Alhabshi, Syed Othman & Masih, Abul Mansur M., 2016. "Socioeconomic Development and Its Effect on Performance of Islamic Banks: Dynamic Panel Approaches," MPRA Paper 71888, University Library of Munich, Germany.
    11. Rahul Gupta, 2023. "Financial determinants of corporate credit ratings: An Indian evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1622-1637, April.
    12. Chortareas, Georgios E. & Girardone, Claudia & Ventouri, Alexia, 2013. "Financial freedom and bank efficiency: Evidence from the European Union," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1223-1231.

    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. Elchin Suleymanov & Elvin Alirzayev & Mammad Talibli, 2019. "Role of Economic Freedom in Attracting Investments in the Context of Azerbaijan," International Journal of Economics and Financial Issues, Econjournals, vol. 9(1), pages 87-95.
    2. Bodo Knoll & Hans Pitlik & Martin Rode, 2013. "Economic Freedom, Money and Happiness – Why Deregulation Matters Beyond its Wealth Enhancing Effect," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(2), pages 35-42, 07.
    3. Suk-Joong Kim & Eliza Wu, 2018. "International Bank Flows to Emerging Markets: Influence of Sovereign Credit Ratings and Their Regional Spillover Effects," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 14, pages 467-515, World Scientific Publishing Co. Pte. Ltd..
    4. Aktug, R. Erdem & Nayar, Nandkumar (Nandu) & Vasconcellos, Geraldo M., 2013. "Is sovereign risk related to the banking sector?," Global Finance Journal, Elsevier, vol. 24(3), pages 222-249.
    5. Chen, Sheng-Syan & Chen, Hsien-Yi & Chang, Chong-Chuo & Yang, Shu-Ling, 2013. "How do sovereign credit rating changes affect private investment?," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4820-4833.
    6. Justesen, Mogens K., 2008. "The effect of economic freedom on growth revisited: New evidence on causality from a panel of countries 1970-1999," European Journal of Political Economy, Elsevier, vol. 24(3), pages 642-660, September.
    7. 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.
    8. Stocker, Marshall L., 2016. "The price of freedom: A Fama–French freedom factor," Emerging Markets Review, Elsevier, vol. 26(C), pages 1-19.
    9. Judit Kapás & Pál Czeglédi, 2017. "Institutions and policies of economic freedom: different effects on income and growth," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(2), pages 259-282, August.
    10. Compton, Ryan A. & Giedeman, Daniel C. & Hoover, Gary A., 2014. "A distributional analysis of the benefits of economic freedom," European Journal of Political Economy, Elsevier, vol. 33(C), pages 121-133.
    11. Rode, Martin & Gwartney, James D., 2012. "Does democratization facilitate economic liberalization?," European Journal of Political Economy, Elsevier, vol. 28(4), pages 607-619.
    12. Patrycja Klusak & Matthew Agarwala & Matt Burke & Moritz Kraemer & Kamiar Mohaddes, 2023. "Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness," Management Science, INFORMS, vol. 69(12), pages 7468-7491, December.
    13. Sahibzada, Irfan Ullah, 2023. "To what extent do sovereign rating actions affect global equity market sectors?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 240-261.
    14. Jamie Bologna & Joshua C. Hall, 2014. "Economic Freedom Research: Some Comments and Suggestions," Working Papers 14-23, Department of Economics, West Virginia University.
    15. Schumacher, Ingmar, 2014. "On the self-fulfilling prophecy of changes in sovereign ratings," Economic Modelling, Elsevier, vol. 38(C), pages 351-356.
    16. Judit Kapás & Pál Czeglédi, 2007. "Economic Freedom: Theory First, Empiricism After," ICER Working Papers 10-2007, ICER - International Centre for Economic Research.
    17. Joshua C. Hall, 2016. "Institutional convergence: exit or voice?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(4), pages 829-840, October.
    18. Chen, Sheng-Syan & Chen, Hsien-Yi & Chang, Chong-Chuo & Yang, Shu-Ling, 2016. "The relation between sovereign credit rating revisions and economic growth," Journal of Banking & Finance, Elsevier, vol. 64(C), pages 90-100.
    19. Cohen, Joseph N, 2009. "Is “economic freedom” strictly free market capitalism? A decompositional analysis of the Economic Freedom of the World index," MPRA Paper 22437, University Library of Munich, Germany.
    20. Lee, Kuan-Hui & Sapriza, Horacio & Wu, Yangru, 2016. "Sovereign debt ratings and stock liquidity around the World," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 99-112.

    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:eme:jfeppp:v:2:y:2010:i:2:p:149-162. 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: Emerald Support (email available below). General contact details of provider: .

    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.