TY - JOUR
T1 - Politicians’ connections and sovereign credit ratings
AU - Klusak, Patrycja
AU - Uymaz, Yurtsev
AU - Alsakka, Rasha
N1 - Data availability statement: The authors do not have permission to share data.
PY - 2024/7
Y1 - 2024/7
N2 - Using a unique hand-collected sample of professional connections between finance ministers and the top executives of the three largest credit rating agencies (CRAs) for 38 European sovereigns between January 2000 and November 2017, we show that professional connections result in higher sovereign ratings. This finding is attributed to ‘favoritism’, which stems from the conflict-of-interest problem in the CRA business model. We also find that the subjective component of ratings, captured by professional connections, has a more pronounced role for developing than developed countries. Our study offers new empirical evidence that unsolicited sovereign ratings are significantly lower than solicited ratings. Our results survive battery of robustness checks including propensity score matching (PSM), two-way fixed-effects, system GMM and various definitions of connection. Our findings offer wide-ranging implications for regulators, governments, market participants and CRAs.
AB - Using a unique hand-collected sample of professional connections between finance ministers and the top executives of the three largest credit rating agencies (CRAs) for 38 European sovereigns between January 2000 and November 2017, we show that professional connections result in higher sovereign ratings. This finding is attributed to ‘favoritism’, which stems from the conflict-of-interest problem in the CRA business model. We also find that the subjective component of ratings, captured by professional connections, has a more pronounced role for developing than developed countries. Our study offers new empirical evidence that unsolicited sovereign ratings are significantly lower than solicited ratings. Our results survive battery of robustness checks including propensity score matching (PSM), two-way fixed-effects, system GMM and various definitions of connection. Our findings offer wide-ranging implications for regulators, governments, market participants and CRAs.
KW - Professional connections
KW - Rating solicitation
KW - Sovereign credit ratings
UR - http://www.scopus.com/inward/record.url?scp=85196351963&partnerID=8YFLogxK
U2 - 10.1016/j.intfin.2024.102022
DO - 10.1016/j.intfin.2024.102022
M3 - Article
SN - 1042-4431
VL - 94
JO - Journal of International Financial Markets, Institutions & Money
JF - Journal of International Financial Markets, Institutions & Money
M1 - 102022
ER -