Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries

Vaaler, Paul M.; Schrage, Burkhard N.; Block, Steven

doi:10.2139/ssrn.385884

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Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries

40 Pages Posted: 11 May 2003

See all articles by Paul M. Vaaler

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Steven Block

Tufts University - The Fletcher School of Law and Diplomacy

Date Written: February 2003

Abstract

We use partisan and opportunistic political business cycle "PBC" considerations to develop a framework for explaining election-period decisions by credit rating agencies "agencies" publishing developing country sovereign risk-ratings "ratings". We test six hypotheses derived from the framework with 482 agency ratings for 19 countries holding 39 presidential elections from 1987-2000. We find that ratings are linked to the partisan orientation of incumbents facing election and to expectations of incumbent victory. Consistent with the framework, rating effects are sometimes greater for right-wing compared to left-wing incumbents, perhaps, because partisan PBC considerations with right-wing (left-wing) incumbents reinforce (counteract) opportunistic PBC considerations.

Keywords: Economics, Elections, Developing Countries, Ratings

JEL Classification: D72, F30, F34, G12, G14, G15, G29

Suggested Citation: Suggested Citation

Vaaler, Paul M. and Schrage, Burkhard N. and Block, Steven, Democratization's Risk Premium: Partisan and Opportunistic Political Business Cycle Effects on Sovereign Ratings in Developing Countries (February 2003). Available at SSRN: https://ssrn.com/abstract=385884 or http://dx.doi.org/10.2139/ssrn.385884