Anh Nguyen (ICMA) – “The real impact of sovereign rating changes: Sovereign ceiling or crowding out of public debts?” – PhD Seminar

Abstract

This paper investigates the impacts of sovereign ratings on domestic corporate investments. Based on a sample of 1757 non-financial firms in 51 countries from 1994 to 2018, we find significant impacts of sovereign ratings on domestic investments, after controlling for corporate creditworthiness. Specifically, firms domiciled in a recently downgraded sovereign reduce investments by 32%, even if their credit ratings are unchanged following the negative sovereign rating event. There is no evidence of increases in firms’ investments following sovereign upgrades. Further investigations reveal that a crowding out effect of government debts is an important channel for corporate-sovereign rating spillovers. Public debt overhangs exacerbate negative impacts of sovereign downgrades on corporate investing activities.