To corroborate my findings, I plan to perform a number of robustness checks once I have all data available for evaluation. For example:
• Running regressions with different choices for the time period; Pre-GFC and post-GFC samples. If my theory is right, we should see more pronounced political biases after governments took over major financial institutions in the wake of the GFC.
• Running the main regressions with an ordered-probit model; Note that the dependent variable used in the OLS regressions is treated as cardinal. That is, the difference between a “AAA” and the subjacent “AA+” (a one-notch drop from the highest grade) is the same as between a “BBB-” and the subjacent “BB+” (a one-notch drop below the threshold to speculative grade). In settings with more than 7 values of the dependent variable, the choice between OLS and probit should have little effect on the significance and sign of the coefficients. Nevertheless, I will also run the main specification using an ordered-probit model.
• Running agency-specific regressions; By pooling all agencies in one regression, I make the assumption that each agency weighs all sovereign-specific factors the same way.
Since this may not necessarily be the case, running agency-specific regressions allows
for differential weights and assessments across agencies.
6 Conclusion
The present paper addresses a debate in the literature on credit rating agencies and specifi-cally sovereign credit ratings. The paper argues that there are two types of political biases in sovereign ratings: a home bias and an in-group bias. The home bias leads rating agencies to assign favorable ratings to their home country which are not justified based on economic and political factors of the home country. The in-group bias leads rating agencies to assign favorable ratings to geo-political partners, holding all else constant. The paper first discusses why previous scholarship may not have found evidence of the in-group bias and hypothesizes why such effects should become visible in the data when controlling for hidden debt owed to China and when controlling for the global network of central bank swap lines. Next, the paper discusses all potentially confounding variables and channels that could render the hypothesized biases endogenous. Lastly, the paper suggests an identification strategy and econometric specifications which take potential endogeneity issues into account. Due to COVID-19 library closures, data access is severely limited and the empirical analysis is pending. As soon as the data is available, the author will complete the empirical part and update the paper.
Appendix
Table 5: Rating scales
My scale CI Dagong DBRS Scope Fitch Moody’s JCR R&I S&P
21 AAA AAA AAA AAA AAA Aaa AAA AAA AAA
20 AA+ AA+ AAH AA+ AA+ Aa1 AA+ AA+ AA+
19 AA AA AA AA AA Aa2 AA AA AA
18 AA- AA- AAL AA- AA- Aa3 AA- AA-
AA-17 A+ A+ AH A+ A+ A1 A+ A+ A+
16 A A A A A A2 A A A
15 A- A- AL A- A- A3 A- A-
A-14 BBB+ BBB+ BBBH BBB+ BBB+ Baa1 BBB+ BBB+ BBB+
13 BBB BBB BBB BBB BBB Baa2 BBB BBB BBB
12 BBB- BBB- BBBL BBB- BBB- Baa3 BBB- BBB-
BBB-Investment Grade
Non-investment/Speculative Grade
11 BB+ BB+ BBH BB+ BB+ Ba1 BB+ BB+ BB+
10 BB BB BB BB BB Ba2 BB BB BB
9 BB- BB- BBL BB- BB- Ba3 BB- BB-
BB-8 B+ B+ BH B+ B+ B1 B+ B+ B+
7 B B B B B B2 B B B
6 B- B- BL B- B- B3 B- B-
B-5 CCC+ CCC+ CCCH CCC+ CCC+ Caa1 CCC+ CCC+ CCC+
4 CCC CCC CCC CCC CCC Caa2 CCC CCC CCC
3 CCC- CCC- CCCL CCC- CCC- Caa3 CCC- CCC-
CCC-2 CC CC CC CC CC Ca CC CC CC
1 C C C C C C C C C
1 DDD DDD DDD SD
1 DD DD DD
1 D D D D D D D D
1 RD RD
Note: The data on the rating scales is from the agencies’ websites.
Table 6: Detailed ownership structure of CRAs
Agency HQ Ownership (as of December 2019) Ownership history
CI Limassol,
Cyprus
The shares of CI are held by three individu-als: Afaf Adham, Amin Diab, Zafer Diab and by one Kuwait company: Gulf Injifa Company for General Trading and Contracting. There are no entities rated by CI with an ownership interest in the Company and no rated entity is represented on the administrative board of Gulf Injifa.
No publicly known changes
Dagong Beijing, China
As of April 18 2019, Dagong Global Credit Rating Co., Ltd has been strategically re-structured by China Reform Holdings Co.,Ltd (CRHC), a State-Owned -Enterprises ap-proved by Chinese State Council.
Privately owned since its founding; Guan Jianzhong became major shareholder and pres-ident in 1998
DBRS Toronto, Canada
As of 2019 100 privately owned by the Ameri-can company Morningstar purchased DBRS
100% privately owned by Walter Schroeder since 1976
Scope Berlin, Germany
100% privately owed by Scope ratings. The previous agency was called FERI EuroRating Services AG. It was bought by Scope ratings 1. August 2016 for an undisclosed amount.
100% owned by MLP AG (publicly-traded German company) since 2011; major share-holders of MLP are Manfred Lautenschlaeger (23.38%), Harris Associates (9.82%), Swiss Life (9.9%), HDI Talanx AG (9.89%), Allianz SE (6.27%).30% owned by Harald Quandt Holding GmbH and 70% owned by Feri part-ners until 2006; MLP AG acquired Before that B56.6% including the 30% stake of the Quandt Holding GmbH in 2006
Fitch New York City, USA;
London, UK
100% owned by Hearst group. Part of Fitch Group (100% owned by FI-MALAC) until 2006; 20% were sold to the Hearst Corporation in 2006, additional 20% in 2009 and another 10% in 2012, and the rest in 2018
JCR Tokyo,
Japan
Stock company, largest shareholders: Jiji Press, Ltd. (19.71%), JCR employees’ stock ownership associations (6.51%), K.K. Kyodo News (5.93%), Sumitomo Life Insurance Com-pany (2.68%), Meiji Yasuda Life Insurance Company (2.68%)
No known changes
Moody’s New York City, USA
Publicly traded since 2000; institutional own-ership: 95.34%; top 5 institutional sharehold-ers: Berkshire Hathaway Inc. (13.4%), Cap-ital World Investors (8.1%), Vanguard Group Inc. (6.2%), Bank of New York Mellon Corp (4%), Massachusetts Financial Services Co.
(3.8%); further shareholders: BlackRock, Mor-gan Stanley, State Street, Northern Trust Corp., T. Rowe Price Associates
Owned by US company Dun & Bradstreet from 1961-2000
R&I Tokyo, Japan
Stock company and part of Nikkei Group;
largest shareholders: Nikkei, Inc. (42.72%), Nikkei Business Publications, Inc. (13.41%), Quick Corp. (8.24%), The Bank of Tokyo-Mitsubishi UFJ, Ltd. (4.91%), Sumitomo Mit-sui Banking Corp. (4.60%)
Established through the merger between Japan Bond Research Institute and Nippon In-vestors Service, Inc.
S&P New York City, USA
100% owned by McGraw Hill Companies, Inc., since 1966; major shareholders of the publicly-traded McGraw Hill Companies: Capital World Investors, Vanguard Group, State Street Corp., Oppenheimer Funds Inc., Mor-gan Stanley, Inc.; further shareholders: Black-Rock, Bank of New York Mellon Corp., North-ern Trust Corp., T. Rowe Price Associates
In 1941, merger of Poor’s Publishing (founded 1860) and Standard Statistics (founded in 1906)
Note: All information is from the companies’ websites, annual reports, or documents for shareholder communication.
Table 7: Comparison of control variables used in major studies on credit ratings.
Authors Variables used
Cantor et al. per capita income, GDP growth, inflation, fiscal balance, external balance, external debt, industrialization-dummy, past-default-dummy
Ferri et al. per capita income, real GDP growth, inflation, fiscal balance, exter-nal balance, exterexter-nal debt, industrialization-dummy, (CAB+short-term debt)/foreign exchange reserves
Archer et al. various democracy variables, trade, inflation, CAB, past-default-dummy, external debt, GDP per capita, GDP growth, natural resources
Steps of the rating process
Rating initiation1)
Due diligence2)
Rating assignment3)
Rating publication/monitoring4)
Rating request/unsolicited initiation Assignment of rating team
Data gathering
Questionnaires/meetings with sovereign Gathering additional data
Analysis
Draft report/rating proposal Committee meeting Notification of issuer
Finalized report/rating Rating publiation Ongoing monitoring
Sub-steps
Figure 2: Schematic illustraction of the rating process
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