The determinants of corporate risk in emerging markets: an option‐adjusted spread analysis

Abstract

This study explores the determinants of corporate bond spreads in emerging markets economies. Using a largely unexploited data set, the paper finds that corporate bond spreads are determined by firm-specific variables, bond characteristics, macroeconomic conditions, country-specific sovereign risk, and global factors. A variance decomposition analysis shows that firm-level performance indicators account for the larger share of the variance. In addition, the paper finds that corporate spreads respond more acutely to sovereign and global risk increases rather than to decreases. This suggests two asymmetries prevalent in the data. The first is in line with the sovereign ceiling 'lite' hypothesis, which states that it appears from spreads data that sovereign risk remains a significant determinant of corporate risk although credit rating agencies have gradually moved away from a policy of never rating a corporate above the sovereign. The second is consistent with the popular notion that panics are common in emerging markets where investors are less informed and more prone to herding. Copyright © 2009 John Wiley & Sons, Ltd.

Public investment in developing countries: A blessing or a curse?

“…22 If the deficit is financed with external rather than domestic borrowing, the effect is still the same, as more external borrowing by the government raises country risk and, thus, the cost of financing for domestic firms. Cavallo and Valenzuela (2007) provide evidence that sovereign risk is an important determinant of the cost of financing of private firms in emerging market economies.…”

Is it (Still) Mostly Fiscal? Determinants of Sovereign Spreads in Emerging Markets

“…Cavallo and Valenzuela (2007) also show a significant link between sovereign and private bond spreads using firm-level quarterly data. They report that sovereign risk pass-through to private spreads is less than proportional.…”

Sovereign default and the structure of private external debt

“…There is also a related literature that models the costs of private borrowing and provides evidence that the costs of private foreign loans are a function of sovereign default premium (Ağca and Celasun, 2012;Cavallo and Valenzuela, 2010;Dailami, 2010;Klein and Stellner, 2014;Peter and Grandes, 2005). To the extent that a history of public default increases the costs of future loans for the public sector (as in Catão et al, 2007), the above mentioned works suggest that it will also drive up the costs of private borrowing (see also Yue and Mendoza, 2011).…”