Does Governing Law Affect Bond Spreads?
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 issu...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/10/26868025/governing-law-affect-bond-spreads http://hdl.handle.net/10986/25308 |
| Summary: | 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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