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Sovereign and corporate credit risk: Evidence from the Eurozone

Mascia Bedendo and Paolo Colla ()

Journal of Corporate Finance, 2015, vol. 33, issue C, 34-52

Abstract: We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms' borrowing costs. A deterioration in a country's credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees domestic demand, and credit markets are important credit risk transmission mechanisms.

Keywords: Sovereign risk; Corporate credit risk; Credit default swaps; Eurozone (search for similar items in EconPapers)
JEL-codes: G01 G15 G32 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:33:y:2015:i:c:p:34-52

DOI: 10.1016/j.jcorpfin.2015.04.006

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