Does Corruption Increase Emerging Market Bond Spreads?
36 Pages Posted: 16 Oct 2006
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Does Corruption Increase Emerging Market Bond Spreads?
Does Corruption Increase Emerging Market Bond Spreads?
Date Written: October 31, 2002
Abstract
We study the relationship between corruption and borrowing costs for governments and firms in emerging markets. Combining data on bonds traded in the global market with survey data on corruption compiled by Transparency International, we show that countries that are perceived as more corrupt may pay a higher risk premium when issuing bonds. The global bond market ascribes a significant cost to corruption: an improvement in the corruption score from the level of Lithuania to that of the Czech Republic lowers the bond spread by about one-fifth. This is true even after controlling for macroeconomic effects that are correlated with corruption. We find little evidence that investors became more sensitive to corruption in the wake of the Asian financial crisis.
Keywords: corruption, bond yield, emerging market,
JEL Classification: f3,g3
Suggested Citation: Suggested Citation
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