Document Type

Working Paper

Publication Date



collective action clauses, sovereign yields, reputation of law


When do markets value contract protections? And does the quality of a legal system affect 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 repayment 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.

Library of Congress Subject Headings

Public debts—Law and legislation, Debt relief, Government securities, Contracts, International finance--Law and legislation