Institutional Environment and Sovereign Credit Ratings

40 Pages Posted: 5 Feb 2005

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Larry Fauver

University of Tennessee, Knoxville - Department of Finance; University of Tennessee

Multiple version iconThere are 2 versions of this paper

Date Written: April 3, 2006

Abstract

Using a sample of 86 counties, we examine the cross-sectional determinants of sovereign credit ratings around the world. We find that the quality of legal and political institutions of a country plays a vital role in determining sovereign credit 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 controlling for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Indeed, the economic magnitude of a change in each of those variables is less than one-third of that for legal environment. Although part of this effect is due to legal environment's endogeneity, the relative importance of legal environment is robust to endogeneity concerns.

Keywords: Sovereign credit ratings, legal environment, law and finance

JEL Classification: G1, G30

Suggested Citation

Butler, Alexander W. and Fauver, Larry, Institutional Environment and Sovereign Credit Ratings (April 3, 2006). Available at SSRN: https://ssrn.com/abstract=652661 or http://dx.doi.org/10.2139/ssrn.652661

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Larry Fauver (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

424 Stokely Management Center
Knoxville, TN 37996
United States

University of Tennessee ( email )

424 Stokely Management Center
Department of Finance
Knoxville, TN 37996-0540
United States
865-974-1722 (Phone)
865-974-1716 (Fax)

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