Sovereign Rating, Macroeconomic Indicators and Firm Performance: Evidence from Latin America

Abstract

macroeconomic indicators and the performance of non-financial listed companies based in five Latin America emerging countries, from 2010 to 2017. Using a sample of 1,424 non-financial listed firms, the authors employed a panel data regression. The Chow, Breusch-Pagan and Hausman tests confirmed the fixed effects hypothesis. Return on asset, return on equity and Tobin’s Q were used to measure firm performance. The evidence points that the sovereign rating quality increases return on assets and the market value of Latin American firms. Financial leverage, as well as gross domestic product, interest and inflation rates positively affect company performance, while corporate tax significantly decrease return on asset and Tobin’ Q. The study found significant differences of the effects of sovereign rating, gross domestic product and corporate tax between the performance of companies based in Brazil and their pairs based in Argentina, Chile, Colombia and Mexico. The study provides empirical evidence on the implications of the sovereign rating and macroeconomic policies on companies’ performance in Latin America, considering that few studies address these macroeconomic aspects in the corporate finance field. The empirical evidence has implications related to macroeconomic policies, as well as the consequences of the rating agencies report on managerial decisions Keywords: Sovereign Rating, Macroeconomic Indicators, Leverage, Performance, Latin America. DOI: 10.7176/RHSS/11-8-06 Publication date: April 30 th 2021