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

Steven A. Block (), Burkhard N. Schrage () and Paul M. Vaaler ()

No 546, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan Stephen M. Ross Business School

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 (search for similar items in EconPapers)
JEL-codes: D72 F30 F34 G12 G14 G15 G29 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-pol
Date: 2003-02-01
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Persistent link: http://EconPapers.repec.org/RePEc:wdi:papers:2003-546

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