Bond Restructuring and Moral Hazard: Are Collective Actions Clauses Costly?, Issues 2001-2092
International Monetary Fund, Aug 1, 2001 - Business & Economics - 41 pages
Many official groups have endorsed the wider use by emerging market borrowers of contract clauses which allow for a qualified majority of bondholders to restructure repayment terms in the event of financial distress. Some have argued that such clauses will be associated with moral hazard and increased borrowing costs. This paper addresses this question empirically using primary and secondary market yields and finds no evidence that the presences of collective action clauses increases yields for either higher- or lower-rated issuers. By implication, the perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.
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EI Existing Literature on the Impact of Governing Law on Borrowing Costs
Using Primary Market Data to Estimate the Impact of Governing Law
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absence of CACs adjusted R-squared basis points bond characteristics bond contracts bondholders bonds are issued bonds issued Bondware borrowing costs Brady bonds coefficients on English Collective Action Clauses control variables correct for possible correcting for endogeneity credit ratings currencies debt default dummy variables Eichengreen and Mody emerging market bonds emerging market borrowers English governing law English law bonds English Law Issues eurobonds explanatory variables floating rate notes German law global governing law variables higher-rated impact of governing impact on borrowing implied instrumental variables international bonds investors issuance issued under English issuer characteristics low-rated borrowers lower-rated market participants Mody's moral hazard number of bonds parameter estimates particular percent possible endogeneity primary market data probit probit equation rated English law regression restructuring sample of bonds secondary market data secondary market yields sovereign bonds spreads equation statistically significant U.S. dollars weighted least squares Yankee Yield Spread Data yield spreads York governing law