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

50 Pages Posted: 3 Aug 2016 Last revised: 19 Feb 2019

See all articles by Elena Carletti

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; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 16, 2019

Abstract

We analyze the price effect of the introduction of Collective Action Clauses (CACs) in all newly issued sovereign bonds of Eurozone countries as of January 1, 2013. By allowing a majority of creditors to modify payment obligations, such clauses reduce the likelihood of holdouts while facilitating strategic default by the sovereign. Using a unique matching methodology, we find that CAC bonds trade, in the secondary market, at lower yields than otherwise similar no-CAC bonds. Such yield differential widens in countries with worse ratings and in those with stronger legal systems. The results suggest that Euro CACs are seen as pro-creditor provisions.

Keywords: collective action clauses, sovereign yields, reputation of law

JEL Classification: F33, G12, H63, K12

Suggested Citation

Carletti, Elena and Colla, Paolo and Gulati, Gaurang Mitu and Ongena, Steven R. G., The Price of Law: The Case of the Eurozone Collective Action Clauses (February 16, 2019). Available at SSRN: https://ssrn.com/abstract=2817041 or http://dx.doi.org/10.2139/ssrn.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 Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Steven R. G. Ongena (Contact Author)

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

Sch├Ânberggasse 1
Z├╝rich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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