The Price of Law: The Case of the Eurozone Collective Action Clauses
Carletti, Elena, Paolo Colla, Mitu G. Gulati and Steven Ongena, Forthcoming, The price of law: The case of the Eurozone Collective Action Clauses, Review of Financial Studies.
51 Pages Posted: 3 Aug 2016 Last revised: 25 Jan 2022
Date Written: September 19, 2020
We analyze the price effect of the introduction of Collective Action Clauses (CACs) in 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. We find that CAC bonds trade in the secondary market at lower yields than otherwise similar no-CAC bonds. The yield differential widens in countries with worse ratings and in those with stronger legal systems, especially if of mid-range quality. Hence, CACs are seen as pro- rather than anti-creditor provisions.
Keywords: collective action clauses, sovereign yields, reputation of law
JEL Classification: F33, G12, H63, K12
Suggested Citation: Suggested Citation