Sovereign Bonds and the “Democratic Advantage”: Does Regime Type Affect Credit Rating Agency Ratings in the Developing World?

The importance of sovereign bond ratings has grown recently as assessments by credit rating agencies (CRAs) influence the cost of capital. Understanding how CRAs determine country ratings is difficult based on the secretive nature of these agencies. Controlling for the common explanations in the literature, we use panel data and interviews to investigate the role of the “democratic advantage” and other determinants on bond ratings set by Moody's Investor Services, Standard and Poor's, and Fitch Ratings for fifty developing countries from 1987 to 2003. We find that regime type and most other political factors have little effect on bond raters. Instead, trade, inflation, growth, and bond default strongly affect sovereign ratings. The message for policymakers in developing countries is that factors that support bond repayment are most useful for enhancing CRA ratings.The authors' names are listed alphabetically to indicate equal contribution. For comments on previous versions of this article, we are grateful to Matthias Kaelberer, Sebastian Saiegh, Tim Sinclair, Mike Tomz, Paul Vaaler, Jeff Wooldridge, as well as panelists and participants of the ISA 2006. We thank Nate Jensen, Layna Mosley, and Andy Sobel for helping us make contacts with bond raters. We also thank Tai Scelfo for her research assistance. We greatly acknowledge the generosity of the bond raters for giving us insights on the ratings process. Portions of this research were supported by a 2005 Small Grant by the American Political Science Association.