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The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market

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  • Michael Bradley
  • James D. Cox
  • Mitu Gulati

Abstract

In September 2000, a Brussels court ruled in favor of a hedge fund that held an unpaid debt claim against the Republic of Peru. The decision was based on a novel interpretation of the common pari passu clause. Policy makers and practitioners suggested that this decision signaled a paradigm shift that caused a significant increase in the risk of holdout litigation faced by sovereign debtors. Over the ensuing years, multiple reform solutions were implemented including the revision of certain contractual terms, the filing of amicus briefs in a key New York case, and the passage of legislation in Belgium. This article investigates whether the markets perceived an increase in risk in sovereign debt in the wake of the Brussels court decision. And, to the extent the markets reacted to the increase in legal risk, did any of the antidotes that were implemented to reduce the supposed increased holdout risk work? (c) 2010 by The University of Chicago. All rights reserved.

Suggested Citation

  • Michael Bradley & James D. Cox & Mitu Gulati, 2010. "The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market," The Journal of Legal Studies, University of Chicago Press, vol. 39(1), pages 289-324, January.
    • Handle: RePEc:ucp:jlstud:v:39:y:2010:i:1:p:289-324
    DOI: 10.1086/649769
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    Cited by:

    1. Schumacher, Julian & Trebesch, Christoph & Enderlein, Henrik, 2021. "Sovereign defaults in court," Journal of International Economics, Elsevier, vol. 131(C).
    2. Häseler, Sönke, 2011. "Collective action clauses in sovereign bonds," MPRA Paper 35333, University Library of Munich, Germany.
    3. Chamon, Marcos & Schumacher, Julian & Trebesch, Christoph, 2018. "Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 114, pages 164-179.
    4. Julian Schumacher & Christoph Trebesch & Henrik Enderlein, 2015. "What Explains Sovereign Debt Litigation?," Journal of Law and Economics, University of Chicago Press, vol. 58(3).
    5. repec:zbw:rwirep:0232 is not listed on IDEAS
    6. Belke Ansgar, 2011. "„EU Governance“ und Staateninsolvenz: Optionen jenseits der Kommissionsvorschläge / “EU Governance“ and Insolvency of Governments: Options beyond the Commission Proposals," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 62(1), pages 29-70, January.
    7. Häseler, Sönke, 2008. "Individual Enforcement Rights in International Sovereign Bonds," MPRA Paper 11518, University Library of Munich, Germany.
    8. Klaus, Juergen & Selga, Eriks & Klein, Tony, 2019. "Floating Rate Notes and Stakeholder Activities During Zero and Negative Interest Rate Regimes," QBS Working Paper Series 2019/03, Queen's University Belfast, Queen's Business School.
    9. Ansgar Belke, 2010. "Reinforcing EU Governance in Times of Crisis: The Commission Proposals and Beyond," Discussion Papers of DIW Berlin 1082, DIW Berlin, German Institute for Economic Research.
    10. Sönke Häseler, 2012. "Trustees versus fiscal agents and default risk in international sovereign bonds," European Journal of Law and Economics, Springer, vol. 34(3), pages 425-448, December.
    11. repec:bdi:opques:qef_143_01 is not listed on IDEAS
    12. Häseler, Sönke, 2010. "Trustees versus fiscal agents and default risk in international sovereign bonds," MPRA Paper 35332, University Library of Munich, Germany.
    13. Ansgar Belke, 2010. "Reinforcing EU Governance in Times of Crisis: The Commission Proposals and Beyond," Ruhr Economic Papers 0232, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    14. Klaus, Jürgen & Selga, Ēriks K., 2021. "How floating rate notes stopped floating: Evidence from the negative interest rate regime," International Review of Financial Analysis, Elsevier, vol. 75(C).
    15. Marco Committeri & Francesco Spadafora, 2013. "You never give me your money? Sovereign debt crises, collective action problems, and IMF lending," Questioni di Economia e Finanza (Occasional Papers) 143, Bank of Italy, Economic Research and International Relations Area.
    16. Arturo C. Porzecanski, 2016. "Sovereign Debt Restructuring After Argentina," Development, Palgrave Macmillan;Society for International Deveopment, vol. 59(1), pages 100-106, June.
    17. Stephanie Collet & Kim Oosterlinck, 2019. "Denouncing Odious Debts," Journal of Business Ethics, Springer, vol. 160(1), pages 205-223, November.
    18. Alfredo Bardozzetti & Davide Dottori, 2013. "Collective action clauses: how do they weigh on sovereigns?," Temi di discussione (Economic working papers) 897, Bank of Italy, Economic Research and International Relations Area.

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