Sovereign Credit Ratings, Transparency and International Portfolio Flows

56 Pages Posted: 5 Jun 2014 Last revised: 2 Sep 2014

See all articles by Amar Gande

Amar Gande

Southern Methodist University (SMU) - Finance Department

David C. Parsley

Vanderbilt University - Finance

Date Written: June 4, 2014


We examine the response of equity mutual fund flows to sovereign rating changes in a wide sample of countries during the crisis prone years from 1996-2002. We find that Sovereign downgrades are strongly associated with outflows of capital from the downgraded country while improvements in a country’s sovereign rating are not associated with discernable changes in equity flows. Transparency, as proxied by the level of corruption matters: more transparent (i.e., less corrupt) countries experience smaller outflows around downgrades. Moreover, abnormal flows around downgrades are consistent with a ‘flight to quality’ phenomenon. That is, less corrupt non-event countries are net recipients of capital inflows, and these inflows increase with the severity of the cumulative downgrade abroad. The results remain after controlling for country size, legal traditions, market liquidity, crisis versus non-crisis periods. Taken together, the results suggest that increasing transparency could mitigate some of the perceived negative effects often associated with global capital flows.

Keywords: Asymmetric Effects, Portfolio Flows, Sovereign Rating Agencies

JEL Classification: G15, F36, G14

Suggested Citation

Gande, Amar and Parsley, David C., Sovereign Credit Ratings, Transparency and International Portfolio Flows (June 4, 2014). HKIMR Working Paper No. 12/2014; Vanderbilt Owen Graduate School of Management Research Paper No. 2445765. Available at SSRN: or

Amar Gande

Southern Methodist University (SMU) - Finance Department ( email )

United States
2147681945 (Phone)
2147684099 (Fax)

David C. Parsley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)

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