The Impact of Issuing Foreign Debt on Maturity

22 Pages Posted: 26 May 2022

See all articles by Michael Bradley

Michael Bradley

Duke University - Fuqua School of Business

Irving De Lira Salvatierra

Duke University

Mitu Gulati

University of Virginia School of Law

Date Written: May 25, 2022

Abstract

In this article we examine the relation between the maturity of sovereign debt and the choice of foreign or local contract terms (parameters). Our primary finding is that the maturities of bonds issued by non-investment-grade (NIG) sovereigns are greater when the bonds are written in foreign parameters. Relinquishing certain key levers, capable of expropriating wealth from its bondholders once the bonds have been issued, provides investors with an enhanced commitment that the sovereign will pay the promised interest and principal. Relatedly, the spread on NIG bonds written in foreign parameters is less than the spread on debt written under local parameters. Investors pay a premium for NIG bonds with foreign parameters. We also find that the maturities of bonds issued by investment-grade (IG) sovereigns are greater than that of debt issued by sovereigns rated NIG. An IG rating provides sufficient credibility to honor longer maturity bonds. Finally, we find a positive relation between maturity and the S&P rating of the issuing sovereign for the subsample of NIG bonds. The higher a sovereign’s rating, the greater the commitment that it will repay its debt, and the greater the maturity of the bonds it is able to issue. Overall, these results are consistent with the Credible Commitment Theory found throughout the literature.

Keywords: maturity, sovereign bonds, foreign versus local

JEL Classification: F3, F33, F34, K2, K22, H63, H74, H87

Suggested Citation

Bradley, Michael and De Lira Salvatierra, Irving and Gulati, Mitu, The Impact of Issuing Foreign Debt on Maturity (May 25, 2022). Virginia Public Law and Legal Theory Research Paper No. 2022-37, Virginia Law and Economics Research Paper No. 2022-09, Available at SSRN: https://ssrn.com/abstract=4119642

Michael Bradley

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-8006 (Phone)
919-660-7971 (Fax)

Irving De Lira Salvatierra

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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