Electoral and market rivalry in developing country sovereign risk assessment

We develop and test an integrated theoretical framework for understanding how two forms of rivalry-one related to electoral politics firms observe and the other related to market competition in which these same firms participate - shape risk assessments by firms active in developing countries ("DCs"). Political business cycle ("PBC") theory suggests that incumbent politicians, particularly incumbent politicians with a left-wing orientation, have incentives to implement expansionary economic policies during election years even if such policies impair sovereign government finances and creditworthiness afterwards. Electoral rivalry and the PBC-related economic policies it prompts increases risk to firms, but strategy research suggests that this increase will be moderated due to rivalry among firms in the same DC market segment. We test hypotheses derived from this integrative theoretical framework with a sample of 458 ratings of sovereign government creditworthiness published by five major credit rating agencies for 18 DCs holding 35 presidential elections from 1987-2000. We find that: 1) agency ratings decrease during election years in DCs with left-wing incumbents; but 2) this electoral rivalry effect on risk diminishes as the number of agencies vying for DC rating business increases. Market rivalry among agencies and, perhaps, other firms doing business in DCs can negate risk effects related to electoral rivalry among politicians.