The Price of Law: The Case of the Eurozone Collective Action Clauses
33 Pages Posted: 3 Aug 2016 Last revised: 29 Oct 2017
Date Written: October 29, 2017
Do markets value contract protections? And does the quality of a legal system affect such valuations? To answer these questions we exploit a unique experiment whereby, after January 1, 2013, newly issued sovereign bonds of Eurozone countries under domestic law had to include Collective Action Clauses (CACs) specifying the minimum vote needed to modify payment terms. We find that CAC bonds trade at lower yields than otherwise similar no-CAC bonds; and that the quality of the legal system matters for this differential. Hence, markets appear to see CACs as providing protection against the legal risk embedded in domestic-law sovereign bonds.
Keywords: collective action clauses, sovereign yields, reputation of law
JEL Classification: F33, G12, H63, K12
Suggested Citation: Suggested Citation