Do Transnational Rating Agencies “Regulate” National Political Budget Cycles?

Regulatory theory assumes governments constrain undesirable behavior by firms, but the opposite could be true internationally. We show how with credit rating agencies (CRAs) and election-year government borrowing. Political business cycle theory implies that governments sometimes borrow excessively to retain office. Transnational regime theory implies that CRAs regulating global credit allocation can threaten borrowing governments with rating downgrades signaling poor economic stewardship to voters. Analyses of CRA ratings and government borrowing for 63 countries holding 109 elections from 2001-2011 indicate support for both implications: 1) governments increase election-year borrowing; 2) CRA rating downgrades increase government electoral defeat likelihoods; and 3) governments diminish excessive election-year borrowing when CRAs signal higher downgrade likelihoods. Such reverse “regulation” raises new issues for international business research, practice, and public policy.