Financial Reporting Transparency, International Institutions, and Sovereign Borrowing Costs

Hallerberg, M., Copelovitch, M. & Gandrud, C. (2017). Financial Reporting Transparency, International Institutions, and Sovereign Borrowing Costs. International Studies Quarterly,

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Abstract

What explains variation in sovereign borrowing costs, and what role does information about the state of a country’s financial sector play in the determination of those costs? Investors charge more interest when there are higher default risks. When estimating default risks, investors consider more than explicit public debt levels and include the risk that the financial sector poses to sovereigns in their calculations. Investors are more confident of their assessments when regulators release credible data on the shape and health of their financial sectors. Investors reward more transparent governments with lower sovereign borrowing costs. At the same time, we predict that the effectiveness of transparency declines as public debt increases. Testing this argument requires a measure of transparency, so we create a new Financial Data Transparency (FDT) Index. The Index measures governments’ willingness to release credible financial system data. Using the FDT and a sample of high-income OECD countries, we find that such transparency reduces sovereign borrowing costs. The effects are conditional on the level of public indebtedness. Transparent countries with low debt have lower and less volatile borrowing costs.

Item Type: Article
Additional Information: This article has been accepted for publication in International Studies Quarterly Published by Oxford University Press.
Subjects: J Political Science
Divisions: School of Social Sciences > Department of International Politics
URI: http://openaccess.city.ac.uk/id/eprint/16477

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