The Price of Law: The Case of the Eurozone Collective Action Clauses
33 Pages Posted: 7 Nov 2015 Last revised: 16 Nov 2017
Date Written: October 2017
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.
Keywords: collective action clauses, sovereign yields, reputation of law
JEL Classification: G18, G15, H63
Suggested Citation: Suggested Citation