Pernicious effects: How the credit rating agencies disadvantage emerging markets

This paper provides a synthesis of the literature on biases in sovereign credit ratings. Credit rating agencies favor their home countries and the homes of their major shareholders to the detriment of foreign countries. These home and foreign biases have multiple sources, each of which is especially...

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Bibliographic Details
Published in:Research in international business and finance 2016-09, Vol.38, p.286-298
Main Authors: Luitel, Prabesh, Vanpée, Rosanne, De Moor, Lieven
Format: Article
Language:English
Subjects:
Credit rating agencies
Credit ratings
Emerging markets
Home bias
International financial markets
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Summary:This paper provides a synthesis of the literature on biases in sovereign credit ratings. Credit rating agencies favor their home countries and the homes of their major shareholders to the detriment of foreign countries. These home and foreign biases have multiple sources, each of which is especially at the disadvantage of emerging markets. While the characteristics of emerging debt markets make these countries particularly vulnerable to a downward bias in their sovereign credit rating, the consequences of a bad rating are especially severe here. A low credit rating increases borrowing costs, hampers access to international capital markets and inflates risk.
ISSN:0275-5319
1878-3384
DOI:10.1016/j.ribaf.2016.04.009