10 Moody's (1999a, 1999b) methodology for assessing bank credit risk in emerging markets. " l The two panels are unbalanced because not all firms have a rating for each year. The ratings we use are those attributed by Moody's. The basic statistics of the two panels are reported in Table 4. For each year, we attribute to each firm the minimum rating held during that year. In addition, in order to ascertain whether the hypothesized excess sensitivity of emerging economies' private sector ratings to changes in sovereign ratings is asymmetric, we dichotomize firm rating changes into positive (upgradings) and negative (downgradings). Our a priori is that the excess sensitivity might be stronger for negative than for positive changes.

# 5.1 The case of non-bank corporations

The non-bank corporation panel contains observations referring to 980 rated firms-rated in one or more years over 1990-99-from 40 countries.2 Tables 4 and 5 describe the composition of the sample in 1999, when we observe a rating for 895 of the 980 firms. Country-wise, 84.5 per cent of the firmns are based in high-income countries. Sector-wise, approximately one third of the firms are utilities (oil; electric; telecom; water). The median rating is substantially higher in high-income countries (65 against 40); in low-income countries median firn ratings are closer to their respective sovereign ratings (40 to 52.5 against 65 to 100 for high-income countries). Median firm ratings are higher for most utilities and automotive firms; they are lower for firms in the metal industry and in the service sector.

Table 6 reports the results of five different specifications of the panel regression.<sup>13</sup> The first specification is the base one. Results show that non-bank ratings for firm i at time t are negatively related to rating changes for firm i at time _t-1_ (RATING(T-1)) and are strongly positively related to sovereign rating changes at time t (ASOVEREIGN).1 4 i The relationship between sovereign ratings and ratings on domestic denominated instruments should be looser than that for foreign currency denominated instruments (Moody's, 1999). No relationship should instead exist between Moody's Financial Strength Ratings -assessing the firm's stand-alone financial strength - and sovereign ratings. Our empirical analysis will be devoted to assess the relationship between sovereign ratings and ratings on long term bank deposits and debt issues of non-bank corporations.

12 Specifically, we consider the year-minimum sovereign rating for: Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Finland, France, Germany, Greece India, Indonesia, Ireland, Japan, Kazakhstan, Korea, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Panama, Philippines, Poland, Portugal, Russia, Singapore, Spain, Sweden, Switzerland, Thailand, UK, USA, Venezuela.

**_13_** All the regressions are run by OLS with random effects using RATS. The 18 dummies controlling for sector effects are not reported for convenience: they are generally not significant and omitting them doesn't qualitatively alter regression results. The fourth and fifth columns report the same specification as the second and third columns, respectively, the only change being that the specific effect is singled out for HICs instead than for NHICs.

**14** We must point out that SOVEREIGN(T-1) is non-significant in the non-bank panel. This suggests that, in our sample, we cannot identify a long-term relation between firm and sovereign ratings, although a short-term relation is still identified. As we will see below, this contrasts with what we find for the bank panel. Although we don't have a fully satisfactory explanation for this lack of a long-term relation between firm and sovereign ratings, we detect that the paucity of observations for NHICs' firms is more pronounced

_Ferri, Liu, and Mcajnoni, "The Role of Rating Agency Assessments_ **_in_** _Less Developed Countries: Impact of the Proposed Basel Guidelines "_