Can Credit Rating Agencies Affect Election Outcomes?
62 Pages Posted: 17 Nov 2017
Date Written: November 2017
We show that credit rating agency actions can have a significant effect on elections. We identify these effects by exploiting exogenous variation in municipal bond ratings due to Moody's recalibration of its scale in 2010. We find that incumbent politicians in upgraded municipalities experienced an increased likelihood of reelection and higher vote shares. Rating upgrades affect elections by improving voter perceptions of the quality of incumbents, and by producing wealth effects through voters' holdings of municipal bonds. We also establish a link between incumbents' reelection prospects and the improvements in economic conditions that are due to a debt-financed increase in government spending following rating upgrades.
Keywords: Credit ratings, Economic Conditions, elections, Financial constraints, government spending, Municipal Bonds
JEL Classification: D72, G24, H74
Suggested Citation: Suggested Citation