TY - JOUR

T1 - Politicians’ connections and sovereign credit ratings

AU - Klusak, Patrycja

AU - Uymaz, Yurtsev

AU - Alsakka, Rasha

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 - Sovereign credit ratings

KW - Professional connections

KW - Rating solicitation

U2 - 10.1016/j.intfin.2024.102022

DO - 10.1016/j.intfin.2024.102022

M3 - Article

VL - 94

JO - Journal of International Financial Markets, Institutions and Money

JF - Journal of International Financial Markets, Institutions and Money

SN - 1042-4431

M1 - 102022

ER -