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Sovereign Credit Ratings, Transparency and International Portfolio Flows

Amar Gande and David Parsley

MPRA Paper from University Library of Munich, Germany

Abstract: We examine the response of equity mutual fund flows to sovereign rating changes in a wide sample of countries during the crisis prone years from 1996-2002. We find that Sovereign downgrades are strongly associated with outflows of capital from the downgraded country while improvements in a country’s sovereign rating are not associated with discernable changes in equity flows. Transparency, as proxied by the level of corruption matters: more transparent (i.e., less corrupt) countries experience smaller outflows around downgrades. Moreover, abnormal flows around downgrades are consistent with a ‘flight to quality’ phenomenon. That is, less corrupt non-event countries are net recipients of capital inflows, and these inflows increase with the severity of the cumulative downgrade abroad. The results remain after controlling for country size, legal traditions, market liquidity, crisis versus non-crisis periods. Taken together, the results suggest that increasing transparency could mitigate some of the perceived negative effects often associated with global capital flows.

Keywords: Asymmetric effects; portfolio flows; sovereign rating agencies (search for similar items in EconPapers)
JEL-codes: F36 G14 G15 (search for similar items in EconPapers)
Date: 2010-02
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Sovereign Credit Ratings, Transparency and International Portfolio Flows (2014) Downloads
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