TY - JOUR

T1 - The Impact of Sovereign Credit Ratings on Voters’ Preferences

AU - Lam Thy Nguyen, Phuc

AU - Alsakka, Rasha

AU - Mantovan, Noemi

PY - 2023/9

Y1 - 2023/9

N2 - We investigate the political power of credit rating agencies by building a theoretical model that illustrates how heterogeneous voters change their political preferences after receiving credit signals which infer the quality of their governments. We empirically test this hypothesis using a rich dataset of daily sovereign ratings, outlook and watch signals assigned by S&P, Moody’s and Fitch to EU countries from 2000 to 2017, along with a unique dataset measuring public support for governments. We find that negative rating signals lead to a significant decrease in government support, therefore influencing the electoral prospects of political parties. Both sociotropic and egocentric voters’ preferences are affected by sovereign ratings. Our results are confirmed across a battery of robustness tests and various modelling approaches, including fixed effects and difference in differences models and propensity score matching. Our findings offer wide-ranging implications for policy makers, political parties, governments, and the rating industry.

AB - We investigate the political power of credit rating agencies by building a theoretical model that illustrates how heterogeneous voters change their political preferences after receiving credit signals which infer the quality of their governments. We empirically test this hypothesis using a rich dataset of daily sovereign ratings, outlook and watch signals assigned by S&P, Moody’s and Fitch to EU countries from 2000 to 2017, along with a unique dataset measuring public support for governments. We find that negative rating signals lead to a significant decrease in government support, therefore influencing the electoral prospects of political parties. Both sociotropic and egocentric voters’ preferences are affected by sovereign ratings. Our results are confirmed across a battery of robustness tests and various modelling approaches, including fixed effects and difference in differences models and propensity score matching. Our findings offer wide-ranging implications for policy makers, political parties, governments, and the rating industry.

U2 - 10.1016/j.jbankfin.2023.106938

DO - 10.1016/j.jbankfin.2023.106938

M3 - Article

VL - 154

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

M1 - 106938

ER -