This paper examines the information content of firm ratings. We disentangle the relative contribution to firms' ratings of sovereign risks and of the individual firms' performance indicators employed by rating agencies. We reach three conclusions. First, the contribution of sovereign risk to firm ratings is high in developing countries but is negligible in developed countries. Second, even after controlling for the “country ceiling effect” (i.e., the constraint put on the private firms' rating by the rating of the country in which the firms operate), the information content of ratings for firms in developing countries is much smaller than for firms in developed countries. Third, cross-country indicators of information quality help explain these discrepancies, but they do not entirely account for them.


The authors would like to thank seminar participants from the Asian Development Bank Institute, the University of Bari, the 2002 Royal Economic Society annual meeting in Warwick, and the 2002 Eastern Finance Association annual meeting in Baltimore. This is a revised version of a paper presented at the Asian Economic Panel meeting held on 8–9 October 2002 at Columbia University, New York. Cliff Griep and Cecile Saavedra of Standard and Poor's gave guidance that has helped our understanding of S&P's rating methodology. Tanya Tansupasiri provided excellent research assistance.

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