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Institutional Environment and Sovereign Credit Ratings
Author(s) -
Butler Alexander W.,
Fauver Larry
Publication year - 2006
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2006.tb00147.x
Subject(s) - endogeneity , sovereign credit , economics , standard deviation , credit rating , index (typography) , inflation (cosmology) , monetary economics , default , bond credit rating , sample (material) , credit risk , econometrics , financial system , credit default swap , actuarial science , statistics , finance , credit reference , physics , chemistry , mathematics , chromatography , world wide web , computer science , theoretical physics
We use a sample of 86 counties to examine the cross‐sectional determinants of sovereign credit ratings. We find that the quality of a country's legal and political institutions plays a vital role in determining these 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 we control for obvious factors such as GDP per capita, inflation, foreign debt per GDP, previous defaults, and general development. Although part of this effect is due to the legal environment's endogeneity, its relative importance is robust to endogeneity concerns.