What drives differences of opinion in sovereign ratings? The roles of information disclosure and political risk

Abstract

This paper investigates the causes of split sovereign ratings across S&P, Moody's, and Fitch for 64 countries from 1997 to 2011. We identify that split sovereign ratings are not symmetric, with S&P tending to be the most conservative agency. We find that opaque sovereigns are more likely to receive split ratings. Political risk plays a highly significant role in explaining split ratings and dominates economic and financial indicators. Out‐of‐sample model performance is enhanced by capturing political risk. Government information disclosure affects split ratings between Moody's and Fitch in emerging countries. The study implies an incentive for governments to reduce political uncertainty and to enhance transparency.

Co‐Movement of Political Risk and Sovereign Credit Risk: A Wavelet Coherence Analysis for Argentina, Brazil, and Venezuela

“…However, little empirical evidence has been devoted to political risk, and it mainly discusses the politics of credit ratings rather than examining the interlinkages between political risk and sovereign ratings. Vu, Alsakka, and Gwilym (), for example, examine the roles of information disclosure and political risk in the differences between sovereign rating agencies’ rating decisions.…”

Investors’ heterogeneous beliefs and the impact of sovereign credit ratings in foreign exchange and equity markets

“…In addition, disagreements across CRAs on their assessment of sovereigns' creditworthiness are very common (e.g. Vu et al, 2017 Gande and Parsley, 2005;Ferreira and Gama, 2007;Ismailescu and Kazemi, 2010;Hill et al, 2018). Alternatively, some researches have eliminated 'contaminated' events where multiple CRAs release sovereign credit rating actions within a specified time window.…”

The influence of rating levels and rating convergence on the spillover effects of sovereign credit actions

“…Several studies suggest that sovereign rating levels and actions can be determined by quantitative economic and financial indicators such as GDP per capita, GDP growth, inflation, external debt, level of economic development and default history, as well as qualitative factors such as political and institutional environments (Afonso et al, 2011;Vu et al, 2017). These determinants capture the capacity as well as the willingness of the sovereign to meet its debt obligations on time and as promised.…”

“…in Poland, Portugal and Spain, and conflict between Russia and Ukraine. The assessment of political issues usually involves subjectivity and ambiguity, and hence exaggerates the division 16 Vu et al (2017) provide evidence of harsher split ratings between CRAs in countries in Europe and Central Asia than in the rest of the world during 1997 to 2011. of credit opinions between CRAs. Further, CRAs encounter opacity in sovereign credit risk assessments when governments' information disclosure, transparency and data quality are imperfect, which is the case for many countries in our sample, including Kazakhstan, Russia and Turkey.…”