Sovereign Overhang and the Integration of Equity and Credit Markets Around the World

67 Pages Posted: 21 May 2023

See all articles by Jongsub Lee

Jongsub Lee

Seoul National University; University of Florida - Warrington College of Business Administration

Andy Naranjo

University of Florida

Stace Sirmans

Auburn University

Date Written: May 15, 2023

Abstract

As governments around the world steadily assume greater financial risk, there is concern about the growing sovereign risk that overhangs the private sector. Using a sample of 2,430 firms in 52 countries, we find that firms’ equity and credit returns exhibit higher R2s and are more tightly integrated in environments with greater sovereign risk. As such, emerging economies often exhibit strong equity-credit integration despite severe impediments to arbitrage. We find that sovereign risk contributes to economic policy uncertainty, and sovereign-to-corporate spillover is weakened by strong legal institutions. Our results indicate that elevated sovereign risk drives information to be revealed through credit markets and dampens reactions to firm-level information events. Overall, this study finds that sovereign risk is an important common driving force in firms’ equity and credit returns.

Keywords: Equity-Credit Integration, Systematic Risk, Economic Development, Property Rights, Economic Policy Uncertainty

JEL Classification: G12, G14

Suggested Citation

Lee, Jongsub and Naranjo, Andy and Sirmans, Stace, Sovereign Overhang and the Integration of Equity and Credit Markets Around the World (May 15, 2023). Available at SSRN: https://ssrn.com/abstract=4449079 or http://dx.doi.org/10.2139/ssrn.4449079

Jongsub Lee

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

University of Florida - Warrington College of Business Administration ( email )

Department of Finance Insurance & Real Estate
P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-273-4966 (Phone)
352-392-0301 (Fax)

Andy Naranjo

University of Florida ( email )

Gainesville, FL
United States

Stace Sirmans (Contact Author)

Auburn University ( email )

Auburn, AL 36849
United States

HOME PAGE: http://www.stacesirmans.com

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