Appendix I. Explanatory Variables
Appendix II. Robustness Analysis
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The author wishes to thank Miguel A. Savastano, Marco Piñon, David Vegara, and Herman Kamil for their valuable comments and suggestions; participants at seminars on this research organized at the IMF and the Central Bank of Colombia for useful comments; and Leandro Medina for able research assistance.
See http://www2.standardandpoors.com/aboutcreditratings/RatingsManual_PrintGuide.html for criteria used by Standard and Poor’s; http://www.moodys.com/moodys/cust/research/MDCdocs/09/2007200000530576.pdf?doc_id=2007200000530576&frameOfRef=corporate for criteria used by Moody’s; and http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=474248§or_flag=5&marketsector=1&detail= for criteria used by Fitch.
Borensztein et al. (2007) find that sovereign ratings have a significant effect on private ratings even after controlling for country specific macroeconomic conditions and firm-level performance indicators.
The ratings do not differ significantly across the three agencies. Investment/speculative grade status coincided across the three rating agencies for 94 percent of all observations in the sample. Investment grade is defined as those ratings at or above BBB/Baa.
The pooled estimation does not control for unobserved country effects, while the fixed effects logit model has the disadvantage that only countries where the dependent variable “switches” (from 0 to 1 and vice versa) can be included in the estimation—which in this case would lead to a sizeable number of cases being dropped. In addition, the fixed effects estimations cannot assess the impact of non-time varying country characteristics.
The sample of countries consists of: Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Jamaica, Mexico, Panama, Peru, Uruguay, Venezuela, Bosnia & Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Iceland, Israel, Latvia, Lithuania, Poland, Romania, Russia, Serbia, Turkey, Ukraine, China, Indonesia, Korea, Malaysia, Philippines, Thailand, Vietnam, Egypt, India, Jordan, Kazakhstan, Lebanon, Morocco, Pakistan, South Africa, Sri Lanka, and Tunisia.
A description of the ICRG methodology can be found at https://www.prsgroup.com/ICRG_Methodology.aspx
A comparison of means only could be misleading in the presence of large outliers.
Variables that did not reveal any explicative power were dropped based on Wald tests. The restricted models are robust to alternative exclusion procedures. Furthermore, the variables found to be significant in the unrestricted model generally remain significant with the same sign in the restricted model.
Although rating agencies may assign substantial weight to other factors in determining specific rating assignments to a particular country at a given point in time, no systematic relationship between those variables and investment grade status was detected in the sample. Appendix II discusses the results for individual rating agencies.
Average partial effects are calculated as the partial effects averaged across the population. See Wooldridge (2002).