DP12430 Can Credit Rating Agencies Affect Election Outcomes?
|Author(s):||Igor Cunha, Miguel Ferreira, Rui C Silva|
|Publication Date:||November 2017|
|Keyword(s):||Credit ratings, Economic Conditions, elections, Financial constraints, government spending, Municipal Bonds|
|JEL(s):||D72, G24, H74|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12430|
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.