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How Do Global Credit-Rating Agencies Rate Firms from Developing Countries?

  • Giovanni Ferri

    (Professor, Department of Economics University of Bari Via C. Rosalba, 53 70124 Bari Italy)

  • Li-Gang Liu

    (Assistant Professor of Public Policy School of Public Policy George Mason University 3401 North Fairfax Drive, MS 3B1 Arlington, VA 22201 USA)

This paper examines the information content of firm ratings. We disentangle the relative contribution to firms' ratings of sovereign risks and of the individual firms' performance indicators employed by rating agencies. We reach three conclusions. First, the contribution of sovereign risk to firm ratings is high in developing countries but is negligible in developed countries. Second, even after controlling for the "country ceiling effect" (i.e., the constraint put on the private firms' rating by the rating of the country in which the firms operate), the information content of ratings for firms in developing countries is much smaller than for firms in developed countries. Third, cross-country indicators of information quality help explain these discrepancies, but they do not entirely account for them. Copyright (c) 2004 The Earth Institute at Columbia University and the Massachusetts.

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Article provided by MIT Press in its journal Asian Economic Papers.

Volume (Year): 2 (2003)
Issue (Month): 3 ()
Pages: 30-56

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Handle: RePEc:tpr:asiaec:v:2:y:2003:i:3:p:30-56
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  1. G. Ferri & L.-G. Liu & J. E. Stiglitz, 1999. "The Procyclical Role of Rating Agencies: Evidence from the East Asian Crisis," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 28(3), pages 335-355, November.
  2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  3. Ferri, Giovanni & Liu, Li-Gang & Majnoni, Giovanni, 2001. "The role of rating agency assessments in less developed countries: Impact of the proposed Basel guidelines," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 115-148, January.
  4. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
  5. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  6. Stephen Morris, 1999. "Political Correctness," Cowles Foundation Discussion Papers 1242, Cowles Foundation for Research in Economics, Yale University.
  7. Giovanni Ferri, 2004. "More analysts, better ratings: Do rating agencies invest enough in less developed countries?," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 77-98, May.
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