The Impact of Sovereign Credit Ratings on Corporations: A Literature Review and Research Recommendations

Abstract

During the financial crisis, sovereign ratings have come under increased public scrutiny due to their strong impact on sovereign borrowing costs and hence financial stability of countries. However, their influence on corporations within and outside the respective nations has so far attracted only limited attention, although several academics have provided intriguing insights in this regard. In order to obtain a structured overview of this relatively young strand of research, this paper reviews key insights and conclusions that the extant literature offers on the role of sovereign creditworthiness for corporations. Herein, it focuses on the effects that have been observed for the corporate business environment, access to capital, and foreign investment activities. Different research issues providing fertile ground for future studies are identified.

A motivation for banks in emerging economies to adapt agency ratings when assessing corporate credit

“…Several authors (e.g. Nguyen & Knyphausen-Aufseß 2014;Ryan 2012) have stated that the publicly available rating methodologies are too opaque. In most instances, the methodology and detailed quantitative rules associated with the methodologies are provided, but exactly how the final rating is determined is proprietary to the agency that issued the rating.…”

“…Credit rating agencies were unable to foresee the economic crisis, and often exacerbate a crisis by making sudden downward adjustments amidst the turmoil (Haspolat 2015). The predictive quality, accuracy and timeliness of the credit ratings of securities have also been questioned (Nguyen & Knyphausen-Aufseß 2014).…”

“…Although agencies stress that their ratings should be regarded as opinions and that they cannot be evaluated as 'accurate' or 'inaccurate', many studies conclude that the external ratings should definitely not be regarded as 'accurate' (see e.g. Fourie et al 2013;Fuhrmann 2011;Haspolat 2015;Nguyen & Knyphausen-Aufseß 2014).…”

“…Other studies focus on the sectors that are more severely affected by sovereign creditworthiness (Nguyen & Knyphausen-Aufseß 2014). For example, Nguyen and Knyphausen-Aufseß state that, while the export-oriented resources sector is barely affected by sovereign credit risk, the telecommunications sector and the financial sector (both with close regulatory ties) are more likely to be sensitive in this regard.…”

“…This phenomenon is almost exclusively related to foreign currency exposure when involved in crossborder lending. Nguyen and Knyphausen-Aufseß (2014) list some examples of transfer risk: governments in financial distress may impose foreign currency payment restrictions on corporations; they may expropriate private assets or impose higher taxes on corporations to compensate for higher sovereign borrowing cost, thereby reducing corporations' ability to serve their debt; and they can implicitly or explicitly render financial support to private borrowers in distress, that is, grant payment guarantees. Claessens and Embrechts (2002) found that although internal and external ratings (measuring transfer risk and sovereign risk) are driven by similar factors and both underestimate cross-border risk, external ratings are somewhat slower in adjusting to specific events.…”