Sovereign Bonds and the : Does Regime Type Affect Credit Rating Agency Ratings in the Developing World (original) (raw)
Much scholarship in the political economy literature has investigated the influence of the democratic advantage on sovereign bond ratings by credit rating agencies~CRAs!+ Missing from earlier work, however, is inquiry into the effects on bond ratings of factors that lower political risk, such as adherence to the rule of law, the presence of a strong and independent judicial system, and protection of property rights+ Using panel data for up to thirty-six developing countries from 1996 to 2006, we find that rule of law, strong and independent courts, and protection of property rights have significant positive effects on bond ratings+ Policymakers wanting to obtain higher bond ratings and increased revenue from bond sales would do well to heed the message contained in these findings+ This article seeks to show that strong courts, adherence to the rule of law, and protection of property rights are important factors used by the three main credit rating agencies~CRAs!-Moody's Investor Services~Moody's!, Standard and Poor's~S&P!, and Fitch Ratings~Fitch!-when assessing the quality of bonds issued by sovereign nations+ Building on scholarly literatures that have shown a "democratic advantage" for countries seeking to attract foreign direct investment FDI! and foreign portfolio investment~PI!, 1 we demonstrate that a democratic advantage also exists for receiving higher sovereign bond ratings+ Although our findings contrast with previous studies that suggest the limitations of the democratic advantage argument for sovereign debt repayment, 2 the honoring by sover-We thank Karl DeRouen and Paul Vaaler for providing us with valuable insights on bond ratings research+ We also greatly appreciate the advice of the two anonymous reviewers of our manuscript+
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