Can Credit Rating Agencies Affect Election Outcomes?

Igor Cunha
University of Kentucky

Miguel Ferreira
Nova School of Business and Economics

Rui Silva
London Business School

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Abstract: We show that credit rating agencies can have a significant effect on election outcomes. 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 experience an increase in their likelihood of reelection and their vote shares. These rating upgrades improve voters’ opinions about the incumbent and produce positive wealth effects through voters’ holdings of local municipal bonds. In addition, rating upgrades cause an expansion of local governments’ debt capacity that allows the incumbent to increase spending and improve local economic conditions. 

Published: January, 2019