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Does governing law affect bond spreads ?

Author

Listed:
  • Ratha,Dilip K.
  • De,Supriyo
  • Kurlat,Sergio Andres
  • Ratha,Dilip K.
  • De,Supriyo
  • Kurlat,Sergio Andres
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.

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  • Ratha,Dilip K. & De,Supriyo & Kurlat,Sergio Andres & Ratha,Dilip K. & De,Supriyo & Kurlat,Sergio Andres, 2016. "Does governing law affect bond spreads ?," Policy Research Working Paper Series 7863, The World Bank.
    • Handle: RePEc:wbk:wbrwps:7863
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    2. Yinghui Chen & Lunan Jiang, 2019. "Liquidity Risk and Corporate Bond Yield Spread: Evidence from China," CFDS Discussion Paper Series 2019/9, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
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    5. Nicoletta Layher & Eyden Samunderu, 2020. "The Impact of the Introduction of Uniform European Collective Action Clauses on European Government Bonds as a Regulatory Result of the European Sovereign Debt Crisis," JRFM, MDPI, vol. 14(1), pages 1-32, December.

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    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;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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