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Measuring the Effect of Corruption on Sovereign Bond Ratings

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  • Michael Connolly

Abstract

Instrumenting for sovereign corruption, we find that Transparency International’s Corruption Perceptions Index which ‘ranges from 10 (highly clean) to 0 (highly corrupt)’, is a significant predictor of the Standard and Poor’s sovereign bond ratings ranging from 1 (Sovereign Default) to 22 (AAA) in panel data from 52 countries from 1993 to 2002. Corruption downgrades the creditworthiness of sovereign bonds by diverting loan proceeds from productive projects to less productive ones, if not to offshore accounts. In particular, a one point worsening of the corruption perception index leads to an estimated one‐notch reduction out of 22 in the sovereign bond rating.

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  • Michael Connolly, 2007. "Measuring the Effect of Corruption on Sovereign Bond Ratings," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(4), pages 309-323.
    • Handle: RePEc:taf:jecprf:v:10:y:2007:i:4:p:309-323
    DOI: 10.1080/17487870701552053
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    2. Bastien Drut, 2010. "Sovereign Bonds and Socially Responsible Investment," Journal of Business Ethics, Springer, vol. 92(1), pages 131-145, April.
    3. Gunther Capelle-Blancard & Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi & Bert Scholtens, 2016. "Environmental, Social and Governance (ESG) performance and sovereign bond spreads: an empirical analysis of OECD countries," Working Papers hal-01401718, HAL.
    4. Patricia Crifo & Marc-Arthur Diaye & Rim Oueghlissi, 2014. "Measuring the effect of government ESG performance on sovereign borrowing cost," CIRANO Working Papers 2014s-37, CIRANO.
    5. Procasky, William J. & Ujah, Nacasius U., 2016. "Terrorism and its impact on the cost of debt," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 253-266.
    6. Janna Mai Nguyen & Dodo zu Knyphausen‐Aufseß, 2014. "The Impact of Sovereign Credit Ratings on Corporations: A Literature Review and Research Recommendations," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 23(3), pages 125-178, August.
    7. De Moor, Lieven & Luitel, Prabesh & Sercu, Piet & Vanpée, Rosanne, 2018. "Subjectivity in sovereign credit ratings," Journal of Banking & Finance, Elsevier, vol. 88(C), pages 366-392.
    8. Sy-Hoa Ho & Rim Oueghlissi & Riadh El Ferktaji, 2024. "Testing for Causality Between Economic Growth and Environmental, Social, and Governance Performance: New Evidence from a Global Sample," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 7769-7787, June.
    9. Raphael Semet & Thierry Roncalli & Lauren Stagnol, 2021. "ESG and Sovereign Risk: What is Priced in by the Bond Market and Credit Rating Agencies?," Papers 2110.06617, arXiv.org.
    10. Sami Ben Mim & Ridha Nouira & Fatma Mabrouk, 2023. "Non-Linear Determinants of Developing Countries’ Sovereign Ratings: Evidence from a Panel Threshold Regression (PTR) Model," Sustainability, MDPI, vol. 15(4), pages 1-23, February.
    11. Anand, Arsh & Vanpée, Rosanne & Lončarski, Igor, 2023. "Sustainability and sovereign credit risk," International Review of Financial Analysis, Elsevier, vol. 86(C).
    12. Carmelo León & Jorge Araña & Javier León, 2013. "Correcting for Scale Perception Bias in Measuring Corruption: an Application to Chile and Spain," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 114(3), pages 977-995, December.
    13. Capelle-Blancard, Gunther & Crifo, Patricia & Diaye, Marc-Arthur & Oueghlissi, Rim & Scholtens, Bert, 2019. "Sovereign bond yield spreads and sustainability: An empirical analysis of OECD countries," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 156-169.
    14. Sounman Hong & Daniel Nadler, 2016. "The impact of political institutions on U.S. state bond yields during crises: evidence from the 2008 credit market seizure," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 19(1), pages 77-89, March.
    15. Bilbao-Terol, Amelia & Arenas-Parra, Mar & Cañal-Fernández, Verónica & Antomil-Ibias, José, 2014. "Using TOPSIS for assessing the sustainability of government bond funds," Omega, Elsevier, vol. 49(C), pages 1-17.

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