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The Price of Law: The Case of the Eurozone Collective Action Clauses

Author

Listed:
  • Elena Carletti

    (Bocconi University and European University Institute)

  • Paolo Colla

    (Bocconi University)

  • G. Mitu Gulati

    (Duke University School of Law)

  • Steven Ongena

    (University of Zurich, Swiss Finance Institute, KU Leuven, and Centre for Economic Policy Research (CEPR))

Abstract
Do markets value contract protections and does the quality of a legal system affect such valuations? We answer these questions by analysing a quasi-natural experiment whereby after January 1, 2013, newly issued sovereign bonds of all Eurozone countries started to include Collective Action Clauses (CACs) specifying the minimum vote needed to modify repayment. We find that the new contract term is priced, i.e., CAC bonds trade at lower yields relative to otherwise similar bonds that do not include CACs, and also that the quality of the legal system matters for this differential: The better the legal system, the lower the yield.

Suggested Citation

  • Elena Carletti & Paolo Colla & G. Mitu Gulati & Steven Ongena, 2017. "The Price of Law: The Case of the Eurozone Collective Action Clauses," Swiss Finance Institute Research Paper Series 17-35, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1735
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2686879
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    Cited by:

    1. Patrick Bolton & Mitu Gulati & Ugo Panizza, 2023. "Sovereign Debt Puzzles," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 239-263, November.
    2. Silvia Marchesi & Tania Masi & Pietro Bomprezzi, 2021. "Is to Forgive to Forget? Sovereign Risk in the Aftermath of a Default," Development Working Papers 475, Centro Studi Luca d'Agliano, University of Milano.
    3. Schumacher, Julian & Trebesch, Christoph & Enderlein, Henrik, 2021. "Sovereign defaults in court," Journal of International Economics, Elsevier, vol. 131(C).
    4. Chuck Fang & Julian Schumacher & Christoph Trebesch, 2021. "Restructuring Sovereign Bonds: Holdouts, Haircuts and the Effectiveness of CACs," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 155-196, March.
    5. Sebastian M. Saiegh & Glen Biglaiser, 2024. "The value of legal recourse in sovereign bond markets: Evidence from Argentina," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 21(3), pages 669-709, September.
    6. Committeri, Marco & Alves, Inês & Arthur, Julien & De Marchi, Raffaele & Essers, Dennis & Keeney, Mary & Kosterink, Patrick & Lieber, Alexander & Martinez-Resano, José Ramon & Osińska, Joanna & Spadaf, 2021. "The IMF’s role in sovereign debt restructurings," Occasional Paper Series 262, European Central Bank.
    7. Lotfi, Somayyeh & Milidonis, Andreas & Zenios, Stavros A., 2024. "Mispricing of debt expansion in the eurozone sovereign credit market," Journal of Financial Stability, Elsevier, vol. 70(C).

    More about this item

    Keywords

    collective action clauses; sovereign yields; reputation of law;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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