Do sovereign credit ratings matter for corporate credit ratings?

Nidhaleddine Ben Cheikh, Oussama Ben Hmiden, Younes Ben Zaied and Sabri Boubaker
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Nidhaleddine Ben Cheikh: ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School
Oussama Ben Hmiden: ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School
Younes Ben Zaied: EDC - EDC Paris Business School
Sabri Boubaker: Métis Lab EM Normandie - EM Normandie - École de Management de Normandie = EM Normandie Business School

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Abstract: This paper proposes a new approach for tackling the issue of the impact of sovereign rating on corporate ratings. As the policy of never rating a private issuer above its government (sovereign ceiling) has been relaxed by the major credit rating agencies, further empirical investigation is needed to identify the key factors that determine the strength of sovereigncorporate nexus. We suggest implementing a nonlinear panel smooth transition regression modelling where the sovereign effect is allowed to vary across different firm-level financial states. Our results reveal that financially healthier corporations in terms of interest and debt coverage ratios are found to be less dependent on their home country credit risk.Our empirical findings have important implications for creditmarket participants and offer a call for a better understanding of the role of firm-specific financial characteristics in the rating decisions.

Keywords: Credit ratings; Sovereign ceiling; Transfer risk; Nonlinear panel data techniques; Emerging markets (search for similar items in EconPapers)
Date: 2020-03-29
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Published in Annals of Operations Research, 2020, 297 (1-2), pp.77-114. ⟨10.1007/s10479-020-03590-z⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05071413

DOI: 10.1007/s10479-020-03590-z

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