36 Pages Posted: 3 Aug 2016 Last revised: 5 Jul 2017
Date Written: August 1, 2016
When do markets value contract protections? And does the quality of a legal system affects such valuations? To answer these questions we exploit a quasi-natural experiment whereby, after January 1, 2013, newly issued sovereign bonds of Eurozone countries under domestic law had to include Collective Action Clauses (CACs), which specify 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 see CACs as reducing 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
Carletti, Elena and Colla, Paolo and Gulati, G. Mitu and Ongena, Steven, The Price of Law: The Case of the Eurozone Collective Action Clauses (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2817041