Dailami, Mansoor2012-03-192012-03-192010-07-01https://hdl.handle.net/10986/3864In much of the standard corporate finance literature in which sovereign debt is treated as a risk free asset, corporate bond prices are seen to depend on idiosyncratic risk factors specific to the issuing company, with public debt playing an indirect role to the extent that it affects the term structure of interest rates. In the corporate world, however, the ability of a borrower to access international capital markets and the terms according to which it can raise capital depend not only on its own creditworthiness, but also on the financial health of its home-country sovereign. In times of financial stress, when investors lose confidence in the government's ability to use public finances to stabilize the economy or provide a safety net for corporations in distress, markets' assessment of private credit risk takes on a completely different dynamic than during normal times, incorporating an additional risk premium to compensate investors for the potential consequences of sovereign default. Using a new database that covers nearly every emerging-market corporate and sovereign entity that has issued bonds on global markets between 1995 and 2009, this paper investigates the degree to which heightened sovereign default risk perceptions during times of market turmoil influence the determination of corporate bond yield spreads, controlling for specific bond attributes and common global risk factors. Econometric evidence presented confirms that investors' perceptions of sovereign debt problems translate into higher costs of capital for private corporate issuers, with the magnitude of such costs increasing at times when sovereign bonds trade at spreads exceeding a threshold of 1000 bps. The key policy recommendation emerging from the analysis relates to the need to improve sovereign creditworthiness in order to prevent a loss in investor confidence that could trigger a panicky sell-off in sovereign debt with adverse macroeconomic and fiscal consequences. Implications for future research point to the need to develop better models of corporate bond pricing and valuation, recognizing explicitly the role of sovereign credit risk.CC BY 3.0 IGOACTIVE MARKETASSET CLASSBALANCE OF PAYMENTSBALANCE OF PAYMENTS CRISISBALANCE SHEETSBANK BALANCE SHEETBANK CREDITBANK LOANBANK LOANSBANKING MARKETBANKING SYSTEMBASIS POINTSBOND HOLDERSBOND INSTRUMENTSBOND ISSUANCEBOND ISSUERSBOND MARKETBOND PRICEBOND PRICESBOND RATINGBOND SPREADBOND SPREADSBOND VALUATIONBOND YIELDBONDHOLDERSBONDSBORROWERBUSINESS CYCLEBUYBACKBUYBACKSCAPITAL FLOWSCAPITAL MARKETCAPITAL MARKET DEVELOPMENTCASH FLOWCASH FLOWSCDSCOLLATERALIZATIONCOLLECTIVE ACTIONSCOLLECTIVE ACTIONS CLAUSESCOMMODITY PRICESCORPORATE BONDCORPORATE BOND ISSUANCECORPORATE BOND ISSUANCESCORPORATE BOND MARKETCORPORATE BONDSCORPORATE BORROWERSCORPORATE CREDIT RISKCORPORATE DEBTCORPORATE DEFAULTCORPORATE GOVERNANCECORPORATE MARKETCORPORATE SECURITIESCOUNTRY CREDITCOUNTRY RISKCOUPONCREDIT AGENCIESCREDIT DEFAULTCREDIT DEFAULT SWAPCREDIT DERIVATIVESCREDIT RATINGSCREDIT RISKCREDIT RISK ASSESSMENTCREDIT RISKSCREDIT SPREADSCREDITORSCREDITWORTHINESSCURRENCYCURRENCY CRISESDEBT CAPITALDEBT CONTRACTDEBT CRISISDEBT ISSUANCEDEBT ISSUERSDEBT MANAGEMENTDEBT OBLIGATIONDEBT OBLIGATIONSDEBT OUTSTANDINGDEBT RESTRUCTURINGDEBT SERVICINGDEBTORDEBTOR COUNTRIESDEFAULT INFORMATIONDEFAULT PROBABILITYDEFAULT RISKDEFAULTSDEVALUATIONDEVELOPING COUNTRIESDISPUTE RESOLUTIONDOMESTIC BANKSDUMMY VARIABLEECONOMIC DEVELOPMENTEMERGING BOND MARKETEMERGING ECONOMIESEMERGING MARKETEMERGING MARKET BONDEMERGING MARKET ECONOMIESEMERGING MARKETSEQUITY MARKETSEQUITY PRODUCTSEUROBONDEXTERNAL BORROWINGEXTERNAL DEBTFACE VALUEFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL DISTRESSFINANCIAL HEALTHFINANCIAL INSTITUTIONSFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL STRESSFISCAL POLICYFIXED EXCHANGE RATEFLOATING RATEFLOATING RATE NOTESFOREIGN BANKFOREIGN CAPITALFOREIGN CURRENCYFOREIGN CURRENCY DEBTFOREIGN CURRENCY LOANFOREIGN DEBTFOREIGN INVESTORSFOREIGN­CURRENCYFREE ASSETGLOBAL BONDGLOBAL BOND MARKETSGLOBAL BUSINESSGLOBAL CAPITALGLOBAL CAPITAL MARKETSGLOBAL MARKETSGOVERNMENT DEBTGOVERNMENT GUARANTEESGOVERNMENT SECURITIESGOVERNMENT SUPPORTHIGH-YIELD BONDINFLATIONINSTITUTIONAL DEVELOPMENTINTEREST RATEINTERNATIONAL BANKINTERNATIONAL BANKINGINTERNATIONAL BONDINTERNATIONAL BOND MARKETSINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL DEBTINTERNATIONAL DEBT MARKETSINTERNATIONAL INTERESTINTERNATIONAL MARKETSINVESTOR CONFIDENCEISSUANCEISSUANCESLIABILITYLIABILITY MANAGEMENTLIQUIDATIONLIQUIDITYLOANLOAN DATALOAN MARKETLOAN MARKETSLOCAL CURRENCIESLOCAL FINANCELONG-TERM INVESTMENTMACROECONOMIC CONDITIONSMACROECONOMIC RISKSMACROECONOMIC VARIABLESMARKET BORROWERSMARKET BORROWINGSMARKET CONDITIONSMARKET CONSTRAINTSMARKET DEBTMARKET DEVELOPMENTMARKET FINANCEMARKET PRACTICEMARKET PRICEMARKETABLE BONDMATURITYMONETARY POLICYPAYMENT OBLIGATIONPOLITICAL RISKPRIVATE BONDPRIVATE BORROWERSPRIVATE BORROWINGPRIVATE CORPORATE DEBTPRIVATE CREDITPRIVATE DEBTPUBLIC DEBTPUBLIC FINANCESRETURNRISK AVERSIONRISK EXPOSURERISK FACTORSRISK PREMIUMSRISKY ASSETSAFETY NETSECONDARY MARKETSMALL BUSINESSESSOVEREIGN BONDSOVEREIGN BOND MARKETSOVEREIGN BOND MARKETSSOVEREIGN BONDSSOVEREIGN DEBTSOVEREIGN DEBT PROBLEMSSOVEREIGN DEFAULTSOVEREIGN DEFAULTSSOVEREIGN ENTITYSOVEREIGN ISSUERSSOVEREIGN RISKSWAPSWAPST-BONDTERM STRUCTURE OF INTEREST RATESTRANSPARENCYTREASURYTREASURY BONDTREASURY BOND YIELDTREASURY SECURITIESTREASURY SECURITYVALUATIONVALUE OF ASSETSWARRANTSYIELD SPREADSWorld Bank10.1596/1813-9450-5380