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Sovereign credit rating provision and financial development

Author

Listed:
  • Oskar Kowalewski

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Prabesh Luitel

    (LEM - Lille économie management - UMR 9221 - UA - Université d'Artois - UCL - Université catholique de Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Rosanne Vanpée

    (Faculty of Economics and Business [Leuven] - KU Leuven - Catholic University of Leuven = Katholieke Universiteit Leuven)

Abstract

This paper examines the impact of obtaining a sovereign credit rating for the first time on financial development in 50 emerging countries. Controlling for endogeneity and selection bias, we show that receiving an initial sovereign credit rating significantly transforms domestic financial systems. Rated countries experience a reallocation of bank assets, reduced reliance on domestic bank financing, and increased access to international bond markets, enabling expanded private-sector credit. Sovereign ratings also stimulate local currency bond market development and enhance foreign currency bond issuance. Additionally, they attract portfolio equity inflows and foster the internationalization of domestic banks, though their effects on direct debt flows and FDI are less pronounced. Overall, our findings highlight the critical role of sovereign credit ratings in advancing financial development and integration in emerging markets.

Suggested Citation

  • Oskar Kowalewski & Prabesh Luitel & Rosanne Vanpée, 2025. "Sovereign credit rating provision and financial development," Post-Print hal-05370699, HAL.
    • Handle: RePEc:hal:journl:hal-05370699
    DOI: 10.1016/j.intfin.2025.102153
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