Resumo

Authors in the financial literature have investigated separately the relationship between corporate governance and capital structure (Kieschnick and Moussawi, 2018; Ruiz, 2017; Uwuibge, 2014), and corporate governance and firm value/performance (Abdallah and Ismail, 2017; Akbar et al., 2016; Jara et al., 2018). However, in addition to the adoption of governance mechanisms, some external factors, like sovereign rating, can significantly influence companies’ debt and value, which are still little discussed in the literature.

This paper investigates the impact of sovereign rating and corporate governance on the leverage and performance of Latin American companies, between 2004 and 2018. The paper also seeks to verify the impacts of country, firm and time levels on leverage and performance variations.

For a long time, the sovereign rating occupied little space in the financial literature, but the important role of rating agencies in the global market has attracted attention in the academy. According to Drago and Gallo (2017), the downgrade of a sovereign rating point out a government’s financial difficulties and directly influences capital markets. In addition, this downgrade increases debt costs related to high interest rates and inflation, and the premium charged by international creditors to offset countries’ risk.

The final sample included 823 non-financial companies listed on the stock exchanges of Argentina, Brazil, Chile, Colombia, Mexico and Peru from 2004 to 2018. Financial, corporate governance and sovereign rating data were collected from Thomson Reuters database. We adopted the dependent variables: financial leverage, return on assets, and Tobin's Q. We used three-level linear hierarchical regressions, with fixed and random coefficients, estimated by maximum likelihood, considering that data require the observation of leverage and performance of each firm in each country over time.

We found that Latin American companies are more leveraged and perform better when their respective countries have a better sovereign rating and when they adopt better board of directors and audit committee mechanisms. Sovereign rating assumes distinct roles depending on the presence or absence of governance variables. Rating and governance may be substitute mechanisms to protect investors. In addition, this study demonstrates that sovereign rating only affects leverage in the absence of governance constructs.

We showed that, in the absence of corporate governance mechanisms, sovereign rating is one of the factors that positively influences the leverage of Latin American firms. However, in the presence of governance attributes, the rating has no longer a significant relationship with leverage. We inferred that sovereign rating and governance may act in this study as substitute mechanisms in their relationship with leverage, as both of them originally act to raise investor confidence. We concluded that the higher the sovereign rating, the higher the return on asset and value of companies.

Almeida, H.; Cunha, I. & Ferreira, M. (2017). The real effects of credit ratings: The sovereign ceiling channel, Journal of Finance, 72(1), 249-290. Bansal, N. & Sharma, K. (2016). Audit committee, corporate governance and firm performance: Empirical evidence from India, International Journal of Economics and Finance, 8(3), 103-116. Jara, M., López-Iturriaga, F., San-Martín, P. & Saona, P. (2018). Corporate governance in Latin American firms: Contestability of control and firm value, Business Research Quarterly. 113(18), 1-18.