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The Home Bias in Sovereign Ratings
Andreas Fuchs and Kai Gehring

Published in: Journal of the European Economic Association 15(6): 1386-1423, December 2017





Abstract
This article assesses potential biases in sovereign debt ratings that are related to the economic and geopolitical interests of the home country of the credit rating agency and its cultural proximity with the rated country. Using data on 143 sovereigns provided by nine agencies based in six countries, we estimate the determinants of sovereign ratings to test whether agencies assign higher ratings to their respective home countries, as well as to economically, geopolitically, and culturally aligned countries. Our regression results show that the respective home country, culturally more similar countries, and countries to which home-country banks have a larger risk exposure receive higher ratings than justified by their economic and political fundamentals. Cultural proximity, as measured by linguistic similarity, is shown to be the main transmission channel that explains the advantage of the home country. Further empirical tests which control for the existence of foreign offices and rated countries’ levels of information transparency suggest that a more optimistic perception of risks rather than informational advantages drives this cultural home bias.

Published article
Supplementary information
Working paper (June 2015)
Working paper (December 2013)
Presentations at conferences and workshops
  • 4th UECE Conference on Economic and Financial Adjustments in Europe, ISEG-University of Lisbon, Portugal (07/2015)
  • Political Economy Lunch, Harvard University, Cambridge, USA (11/2014)
  • Annual Conference of the German Economic Association, Hamburg, Germany (09/2014)
  • China Meeting of Econometric Society, Xiamen University, China (06/2014)
  • Beyond Basic Questions Workshop, Heidelberg University, Germany (06/2014)
  • World Congress of the International Economic Association, King Hussein Bin Talal Convention Center, Jordan (06/2014)
  • Spring Meeting of Young Economists, WU Wien, Vienna, Austria (06/2014)
  • Meeting of the European Public Choice Society, University of Cambridge, UK (04/2014)
  • Volkswirtschaftliches Kolloquium, Helmut-Schmidt-Universität Hamburg, Germany (03/2014)
  • Graduiertenkolleg 1723 Research Workshop, University of Hannover, Germany (12/2013)
  • AWI Departmental Workshop, Heidelberg University, Germany (11/2013)
  • KOF Research Seminar, ETH Zürich, Switzerland (09/2013)
  • Annual Meeting of the American Political Science Association, Chicago, USA (08/2013)
  • Annual Conference of the Canadian Economics Association, HEC Montréal, Canada (06/2013)
  • Doctoral Brown Bag Seminar, Heidelberg University, Germany (05/2013)

In the media (newspapers, blogs)
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