Are Poorer Countries Disadvantaged by the CRAs? Empirically Establishing a Bias

Abstract

In this chapter, we survey the findings of extant empirical studies on bias, before reporting the results of our own methodological approach for assessing bias. Our results provide clear empirical evidence of the existence of bias. The results indicate that S&P, Moody’s and Fitch all find it more difficult to upgrade poor countries relative to rich countries, for any given improvement in ability and willingness to repay debts. S&P and Fitch are further shown to find it more difficult to upgrade African countries relative to other developing countries, for any given improvement in ability and willingness to repay debts. These results are taken as a strong indication of bias, as they are highly significant even though we controlled for the key observed economic and institutional determinants of sovereign debt ratings, unobserved country-specific fixed effects and the CRAs’ desire for rating stability.