How Information Quality of Macro Aggregates Affects Sovereign Risk: An Empirical Investigation

Seung Jung Lee

Review of International Economics, 2009, vol. 17, issue 3, 510-532

Abstract: This paper looks at the relationship between data quality of macro aggregates and the repayment ratio for debt payments due in a given year after a country defaults. We find empirical evidence that good information of macro aggregates reduces sovereign risk by enhancing the repayment ratio conditional on default, while having an insignificant effect on the default probability. The estimation accounts for selection bias by using a cross‐country panel data of 69 developing countries for 1989–2002. Careful consideration is taken to establish information quality of macro aggregates as an exogenous institutional variable. Results are robust to controlling for various governance factors, income levels, and regional factors, etc. Linking information quality to creditors' bargaining power is more consistent with our findings than linking poor information quality to information asymmetry.

Date: 2009
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