Institutional Environment and Sovereign Credit Ratings
Alexander W. Butler
Rice University - Jesse H. Jones Graduate School of Business
University of Tennessee, Knoxville - Department of Finance; University of Tennessee
Financial Management, Vol. 35, No. 3, Autumn 2006
We use a sample of 86 counties to examine the cross-sectional determinants of sovereign credit ratings. We find that the quality of a country's legal and political institutions plays a vital role in determining these ratings. A one-standard-deviation increase in our legal environment index results in an average credit rating increase of 0.466 standard deviations, even when we control for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Although part of this effect is due to the legal environment's endogeneity, its relative importance is robust to endogeneity concerns.
Number of Pages in PDF File: 28Accepted Paper Series
Date posted: October 19, 2006
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