Mind the sovereign ceiling on corporate performance

Thomas Y. To, Eliza Wu and Lambert Zhang

Journal of Corporate Finance, 2022, vol. 75, issue C

Abstract: We find direct evidence that sovereign default risk has a negative impact on corporate performance via a rating spillover pooling mechanism. Our results show that this adverse effect is concentrated in firms that are more likely to experience limited access to external finance following a rating downgrade. Difference-in-differences tests exploiting the heterogeneity in corporate credit ratings following sovereign rating downgrades reveal that firm performance deteriorates predominantly for sovereign bound firms with higher information asymmetry, limited financial flexibility, and those operating in countries with less developed banking systems and weaker investor protection.

Keywords: Credit ratings; Firm performance; Sovereign ceiling; Information asymmetry; Financial constraints (search for similar items in EconPapers)
JEL-codes: G24 G31 G32 G38 H63 I25 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:75:y:2022:i:c:s0929119922000967

DOI: 10.1016/j.jcorpfin.2022.102253

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