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Comparative Political Studies
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Sovereign Bond Ratings and the Democratic Advantage

Portfolio Investment in the Developing World

Glen Biglaiser

Texas Tech University, Lubbock

Brian Hicks

Texas Tech University, Lubbock

Caitlin Huggins

Texas Tech University, Lubbock

As developing countries expose portfolio investors to potential high risk, it is expected that investors will follow the advice of credit rating agencies (CRAs) before sending capital abroad. Controlling for political and economic explanations in the literature, the authors use panel data for 50 developing countries from 1987 to 2003 to determine if changes in CRA ratings affect portfolio flows. Using a two-stage Heckman model, they find that countries that are under newer political institutions and facing economic challenges are more likely to be selected by portfolio investors because they offer risk premia, but that CRA ratings and democracy have significant positive signaling effects on the countries that receive the largest private equity inflows. In fact, democracy and bond ratings are the most important for the poorest developing countries. The results suggest the significance of CRA ratings for equity investors and contribute a revision for the democratic advantage debate.

Key Words: bond ratings • portfolio investment • democratic advantage • developing countries • Heckman model

This version was published on August 1, 2008

Comparative Political Studies, Vol. 41, No. 8, 1092-1116 (2008)
DOI: 10.1177/0010414007308021
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