Mind the Sovereign Ceiling on Corporate Performance

20 December 2022

We find direct evidence that sovereign default risk has a negative impact on corporate performance via a rating spillover channel. Difference-in-differences tests exploiting the heterogeneity in corporate credit ratings following sovereign rating downgrades reveal that firm performance deteriorates predominantly for sovereign bound firms with higher information asymmetry, limited financial flexibility, and those operating in countries with less developed banking systems and lower investor protection.