Sovereign bond spreads and extra-financial performance: An empirical analysis of emerging markets

This paper studies the impact of a country's extra-financial performance on its sovereign bond spreads. Sovereign bond spreads reflect both an economic default risk and a strategic default risk. We hypothesize that a country's extra-financial performance reduces default risk by signalling good commitment ability. We test this hypothesis for the countries which bonds are included in the JP Morgan Emerging Markets Bond Index Global. Over the period from 2001 to 2010, we find that an emerging country's average cost of capital decreases with its governance and social performance. Furthermore, we demonstrate that a good social performance signals an emerging economy's long-term orientation and commitment to repay its debt in the future.