Do markets value contract protections and does the quality of a legal system affect such valuations? We answer these questions by analysing a quasi-natural experiment whereby after January 1, 2013, newly issued sovereign bonds of all Eurozone countries started to include Collective Action Clauses (CACs) specifying the minimum vote needed to modify repayment. We find that the new contract term is priced, i.e., CAC bonds trade at lower yields relative to otherwise similar bonds that do not include CACs, and also that the quality of the legal system matters for this differential: The better the legal system, the lower the yield.
Elena Carletti et al., The Price of Law: The Case of the Eurozone's Collective Action Clause (July 28, 2016)
Library of Congress Subject Headings
Public debts—Law and legislation, Debt relief, Government securities, Contracts, International finance--Law and legislation