Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries

40 Pages Posted: 11 May 2003

See all articles by Paul M. Vaaler

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Burkhard N. Schrage

Singapore Management University

Steven Block

Tufts University - The Fletcher School of Law and Diplomacy

Date Written: February 2003

Abstract

We use partisan and opportunistic political business cycle "PBC" considerations to develop a framework for explaining election-period decisions by credit rating agencies "agencies" publishing developing country sovereign risk-ratings "ratings". We test six hypotheses derived from the framework with 482 agency ratings for 19 countries holding 39 presidential elections from 1987-2000. We find that ratings are linked to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Consistent with the framework, rating effects are sometimes greater for right-wing compared to left-wing incumbents, perhaps, because partisan PBC considerations with right-wing (left-wing) incumbents reinforce (counteract) opportunistic PBC considerations.

Keywords: Economics, Elections, Developing Countries, Ratings

JEL Classification: D72, F30, F34, G12, G14, G15, G29

Suggested Citation

Vaaler, Paul M. and Schrage, Burkhard N. and Block, Steven, Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries (February 2003). William Davidson Institute Working Paper No. 546. Available at SSRN: https://ssrn.com/abstract=385884 or http://dx.doi.org/10.2139/ssrn.385884

Paul M. Vaaler (Contact Author)

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

Burkhard N. Schrage

Singapore Management University ( email )

50 Stamford Rd
Singapore, 178899
Singapore
+65 6828 0755 (Phone)
+65 6828 0777 (Fax)

HOME PAGE: http://www.business.smu.edu.sg/Faculty/management/burkhad_schrage.asp

Steven Block

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2717 (Phone)
617-627-3712 (Fax)

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