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.