Religiosity and sovereign credit quality

Abstract

Sovereign credit quality has been shown to depend on macroeconomic factors, global risk factors, and financial/economic/political/social institutions. In this paper, we find that religiosity, a cultural factor deep-rooted to every national characteristic, can adversely affects sovereign credit. The finding is consistent with the conflict hypothesis that strong religiosity within a country may consume resources, weaken government authority, and lead to political instability, thus exerts a negative influence on sovereign creditworthiness. The results are robust to a number of alternative measures of religiosity and sovereign credit quality, and after control of endogeneity issues using several instrumental variables. In addition, we trace and identify the national financial development as the main channel through which religiosity indirectly affects sovereign credit. Collectively, the new evidence provided in this paper clearly depicts the influential role of religiosity in sovereign credit markets.