Sovereign credit rating provision and financial development

This paper examines the impact of obtaining a sovereign credit rating for the first time on financial development in 50 emerging countries. Controlling for endogeneity and selection bias, we show that receiving an initial sovereign credit rating significantly transforms domestic financial systems. Rated countries experience a reallocation of bank assets, reduced reliance on domestic bank financing, and increased access to international bond markets, enabling expanded private-sector credit. Sovereign ratings also stimulate local currency bond market development and enhance foreign currency bond issuance. Additionally, they attract portfolio equity inflows and foster the internationalization of domestic banks, though their effects on direct debt flows and FDI are less pronounced. Overall, our findings highlight the critical role of sovereign credit ratings in advancing financial development and integration in emerging markets. • Initial sovereign credit ratings stimulate financial development in emerging markets. • Sovereign credit ratings reallocate bank credit from governments to private sectors, enhancing financial growth. • Sovereign credit ratings promote bond market growth, driving a shift toward long-term foreign currency bonds. • Sovereign credit ratings attract foreign portfolio equity and boost banking sector internationalization.