The value of legal recourse in sovereign bond markets: Evidence from Argentina

Abstract

If sovereign immunity waivers and clauses calling for litigation abroad reduce the risk of expropriation, bonds governed by foreign law should, ceteris paribus, trade at a premium compared to bonds issued under domestic law. In 2020, Argentina exchanged a panoply of bonds with different currencies, maturity and coupon structure for pairs of bonds that are identical except for their governing law. We leverage these “twin” bonds to identify the effect of legal jurisdiction on sovereign debt prices. Our findings indicate that foreign-law bonds consistently trade at higher prices and are primarily held by long-term investors. These results suggest that market participants price certain legal terms (e.g., governing law) in sovereign debt, and investors expect to face less credit risk under bonds governed by foreign law, either due to a lower risk of selective default or higher recovery rate in foreign courts.