Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets

34 Pages Posted: 31 Jul 2006

See all articles by Suk-Joong Kim

Suk-Joong Kim

The University of Sydney Business School

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Abstract

How does the sovereign credit ratings history provided by independent ratings agencies affect domestic financial sector development and international capital inflows to emerging countries? We address this question utilizing a comprehensive dataset of sovereign credit ratings from Standard and Poor's from 1995-2003 for a cross-section of 51 emerging markets. Within a panel data estimation framework, we examine financial sector development and the influence of sovereign credit ratings provision, controlling for various economic and corporate governance factors identified in the financial development literature. We find strong evidence that our sovereign credit rating measures do affect financial intermediary sector developments and capital flows. We find that i) long-term foreign currency sovereign credit ratings are important for encouraging financial intermediary development and for attracting capital flows. ii) Long-term local currency ratings stimulate domestic market growth but discourage international capital flows. iii) Short-term ratings (both foreign and local currency denominated) retard all forms of financial developments and capital flows. There are important implications in this research for policy makers to encourage the provision of longer-term credit ratings to promote financial development in emerging economies.

Keywords: Emerging markets, credit ratings, transparency, financial development, capital flows and sovereign risk

JEL Classification: E44, E65, F33, F34, G15

Suggested Citation

Kim, Suk-Joong and Wu, Eliza, Sovereign Credit Ratings, Capital Flows and Financial Sector Development in Emerging Markets. Emerging Markets Review, Vol. 9, No. 1, pp. 17-39, 2008, Available at SSRN: https://ssrn.com/abstract=921263

Suk-Joong Kim (Contact Author)

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+61 2 9114 0940 (Phone)
+61 2 9351 6461 (Fax)

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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