Financial openness, domestic financial development and credit ratings

Abstract

This article shows that financial openness significantly affects corporate and sovereign credit ratings and that the magnitude of this effect depends on the level of development of the domestic financial market. Issuers located in less financially developed economiesi stand to benefit the most from opening up their capital accounts, whereas the impact of this effect decreases as the level of development of the domestic capital market improves.Fondecyt Initiation Project 11130390 Institute for Research in Market Imperfections and Public Policy (Ministerio de Economia, Fomento y Turismo) ICM IS13000

Capital Controls and the Cost of Debt

“…Moreover, firms with higher-quality credit ratings exhibit smaller credit spreads, and firms with a higher short-term debt to total debt ratio have larger spreads. This last result is consistent with the argument that a higher proportion of short-term debt exposes firms to rollover risk (Valenzuela, 2016).…”

“…Endogeneity concerns stemming from potential omitted variables and reverse causality are clearly present at the time of identifying a causal effect of capital controls on corporate bond spreads. We mitigate potential endogeneity concerns associated with omitted variables by estimating panel models with firm and time fixed effects and by controlling for all the standard determinates of corporate bond spreads at the bond, firm, and country level (Merton, 1974;Campbell and Taskler, 2003;Valenzuela, 2016). Additionally, we address reverse causality concerns by considering capital account restrictions of the previous year and by using bond-level data, since the credit spread of an individual bond is unlikely to affect a country's process of financial openness.…”

The relationship between financial development and economic growth during the recent crisis: Evidence from the EU

“…Furthermore, in a more recent study, Shahbaz et al (2017) investigated the drivers of economic growth in China and India using annual data over the period 1970-2013, and the results indicate that financial development increases economic activity in those two countries. Interestingly, in a different study, Andreasen and Valenzuela (2016) found that financial openness has a positive effect on credit ratings and the primary mechanism behind this effect is the domestic financial development.…”

Capital Controls and the Cost of Debt

“…Our study is similar to those of Prati et al (2012) and Andreasen and Valenzuela (2016), who explore the effects of financial openness on corporate credit ratings. However, unlike those studies, this is the first paper that uses bond-level data to explore the effect of capital controls on corporate credit spreads.…”

“…Bekaert et al (2011) demonstrate that the easing of capital controls positively affects capital stock growth and total factor productivity. Prati et al (2012) and Andreasen and Valenzuela (2016) find a strong negative effect of capital account restrictions on corporate credit ratings.…”