Does Governing Law Affect Bond Spreads?

25 Pages Posted: 11 Nov 2016 Last revised: 2 Aug 2019

See all articles by Dilip Ratha

Dilip Ratha

World Bank

Supriyo De

World Bank

Sergio Kurlat

World Bank

Sergio Andres Kurlat

World Bank - Development Prospects Group

Date Written: October 17, 2016

Abstract

Controlling for bond and issuer characteristics, bond spreads are expected to be equal across different legal jurisdictions, and differences are expected to disappear through arbitrage. However, an analysis of 435 U.S. dollar?denominated bonds issued by 53 emerging market sovereigns during 1990-2015 reveals that after the financial crisis of 2008, the launch spread of sovereign bonds issued under U.K. law has been higher than those issued under U.S. law, by 130 basis points for BB bonds and 175 basis points for B- bonds. This effect was not significant for investment grade bonds. On average, bonds issued under U.K. law had weaker ratings and shorter tenors post-crisis. The post-crisis impact of governing law on sovereign bond spreads is not explained by collective action clauses, or first-time bond issuances. Instead, the difference seems to be related to the perception that U.S. law offers stronger investor protection, and that the investor base for bonds issued under U.S. law is larger than that for bonds issued under U.K. law. The difference in spreads persists in the secondary market even after 180 days, perhaps because of the lack of liquidity, as investors tend to buy and hold these more attractive bonds on a longer term basis.

Keywords: Public Sector Administrative and Civil Service Reform, Democratic Government, De Facto Governments, Public Sector Administrative & Civil Service Reform, Bankruptcy and Resolution of Financial Distress, Regulatory Regimes, Legislation, Judicial System Reform, Social Policy, International Law, Legal Reform, Legal Products, Administrative & Regulatory Law, Economic Growth

Suggested Citation

Ratha, Dilip and De, Supriyo and Kurlat, Sergio and Kurlat, Sergio Andres, Does Governing Law Affect Bond Spreads? (October 17, 2016). World Bank Policy Research Working Paper No. 7863, Available at SSRN: https://ssrn.com/abstract=2867623

Dilip Ratha (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Supriyo De

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Sergio Kurlat

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Sergio Andres Kurlat

World Bank - Development Prospects Group

United States

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