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Politicians’ connections and sovereign credit ratings

Author

Listed:
  • Klusak, Patrycja
  • Uymaz, Yurtsev
  • Alsakka, Rasha

Abstract

Using a unique hand-collected sample of professional connections between finance ministers and the top executives of the three largest credit rating agencies (CRAs) for 38 European sovereigns between January 2000 and November 2017, we show that professional connections result in higher sovereign ratings. This finding is attributed to ‘favoritism’, which stems from the conflict-of-interest problem in the CRA business model. We also find that the subjective component of ratings, captured by professional connections, has a more pronounced role for developing than developed countries. Our study offers new empirical evidence that unsolicited sovereign ratings are significantly lower than solicited ratings. Our results survive battery of robustness checks including propensity score matching (PSM), two-way fixed-effects, system GMM and various definitions of connection. Our findings offer wide-ranging implications for regulators, governments, market participants and CRAs.

Suggested Citation

  • Klusak, Patrycja & Uymaz, Yurtsev & Alsakka, Rasha, 2024. "Politicians’ connections and sovereign credit ratings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:intfin:v:94:y:2024:i:c:s104244312400088x
    DOI: 10.1016/j.intfin.2024.102022
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    More about this item

    Keywords

    Sovereign credit ratings; Professional connections; Rating solicitation;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F5 - International Economics - - International Relations, National Security, and International Political Economy
    • G2 - Financial Economics - - Financial Institutions and Services

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