Discussion Paper Details

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Title: Can Credit Rating Agencies Affect Election Outcomes?

Author(s): Igor Cunha, Miguel Ferreira and Rui C Silva

Publication Date: November 2017

Keyword(s): Credit ratings, Economic Conditions, elections, Financial constraints, government spending and Municipal Bonds

Programme Area(s): Financial Economics

Abstract: We show that credit rating agency actions can have a significant effect on elections. We identify these effects by exploiting exogenous variation in municipal bond ratings due to Moody's recalibration of its scale in 2010. We find that incumbent politicians in upgraded municipalities experienced an increased likelihood of reelection and higher vote shares. Rating upgrades affect elections by improving voter perceptions of the quality of incumbents, and by producing wealth effects through voters' holdings of municipal bonds. We also establish a link between incumbents' reelection prospects and the improvements in economic conditions that are due to a debt-financed increase in government spending following rating upgrades.

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Bibliographic Reference

Cunha, I, Ferreira, M and Silva, R. 2017. 'Can Credit Rating Agencies Affect Election Outcomes?'. London, Centre for Economic Policy Research.