The influence of sovereign credit ratings on corporate credit ratings.

Details

Supervisors

Lejeune , Christophe ; Gnabo, Jean-Yves

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

Credit ratings have a key role in modern financial markets as they communicate crucial information on the creditworthiness of a debt issuer to investors and regulators. These credit ratings are mostly determined by three rating agencies, namely Standard & Poor’s, Moody’s and Fitch, even though, the credit rating industry counts a dozen of recognized rating agencies. Indeed, the three agencies have become the market leaders with a market share of 94.3% on the U.S market (Bloomberg, 2015) and 91,89% on the European credit market (ESME, 2015). Hence, these rating agencies have over time, gained attention and power fueled by the development of international financial markets. Every action taken by any of these three agencies creates a tremendous reaction at the global scale and draws an outstanding media coverage. Their influence on the world’s economy has however generated various criticisms as the rating agencies were, in some cases, accused to not be accurate in their predictions and ratings. Several studies have documented the critics on rating agencies and more particularly their involvement in the East-Asian crisis (Ferri et al., 1999; Claessens and Embrechts, 2002), the Subprime crisis (Langohr and Langohr, 2008; Ashcraft et al., 2011; Ryan, 2012) and Eurozone debt crisis (Bedendo and Colla, 2013; Augustin et al., 2016). With a growing amount of criticism came a growing number of questions and scrutiny of the reasons leading an agency to assign a certain rating, not to mention the increase of policies to regulate rating agencies’ actions. Today, the rating agencies’ methodologies are still not entirely transparent, however, some scholars have provided valuable insights on the rating assignment process (such as Gaillard, 2010). Among the literature that have explored the credit rating environment, this thesis joins those studying the determinants of corporate ratings and more precisely those examining sovereign rating as a determinant of corporate ratings (among them Borensztein et al., 2013, Almeida et al., 2014, Augustin et al.,2016). The aim of this thesis is to determine whether sovereign ratings have a significant influence on corporate ratings and if this influence can be more important in a period of crisis. To this end, this thesis analyzes the relationship between sovereign and corporate ratings in five countries – Portugal, Italy, Ireland, Greece, and Spain (or the PIIGS) over the period of 2009 to 2015. Relying on Standard & Poor’s ratings on this period, this thesis carries out a linear regression and an ordered probit analysis with industry, country and year fixed effects. The results indicate that sovereign ratings had a significant influence on corporate ratings on the period of 2009-2016 and that this impact was greater during the years 2009-2012, corresponding to the Eurozone debt crisis.