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

33 Pages Posted: 3 Aug 2016 Last revised: 29 Oct 2017

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

G. Mitu Gulati

Duke University School of Law

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

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Date Written: October 29, 2017

Abstract

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

Carletti, Elena and Colla, Paolo and Gulati, G. Mitu and Ongena, Steven, The Price of Law: The Case of the Eurozone Collective Action Clauses (October 29, 2017). Available at SSRN: https://ssrn.com/abstract=2817041

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Paolo Colla

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Gaurang Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Steven Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

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