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Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds

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  • Stephen Choi
  • G. Gulati

Abstract

Network externalities may lead contracting parties to stay with a "standardized" term despite preferences for another term. Using a dataset of sovereign bond offerings from 1995 to early 2004, we test the importance of standardization for the modification provisions relating to payment terms. We provide evidence that (a) standardization may lead parties to adopt provisions not necessarily out of preference and (b) standards, nonetheless, may change. The process of change, however, is not necessarily quick or straightforward. In the sovereign bond context, change came by way of an "interpretive shock". Contracts with modification provisions requiring the unanimous consent of bondholders (UACs) suddenly became vulnerable to change with less than unanimous approval through the unexpected use of exit consents. After the shock, sovereigns and investors did not initially react with a significant shift in contract terms. However, we provide evidence that after this initial lull (once investors and sovereign gained experience on the value of allowing modification of payment terms with less than unanimous consent), large shifts in contract terms followed, moving sovereign bond contracts even further away from UACs toward collective action clauses (CACs). We also report evidence that issuer's attorneys dealing with a high volume of sovereign offerings were the driving factor behind this delayed large shift in contract terms.

Suggested Citation

  • Stephen Choi & G. Gulati, "undated". "Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds," University of Southern California Legal Working Paper Series usclwps-1006, University of Southern California Law School.
  • Handle: RePEc:bep:usclwp:usclwps-1006
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    File URL: http://law.bepress.com/cgi/viewcontent.cgi?article=1006&context=usclwps
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    Cited by:

    1. Sönke Häseler, 2009. "Collective Action Clauses In International Sovereign Bond Contracts – Whence The Opposition?," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 882-923, December.
    2. Daniels, Kenneth & Ramirez, Gabriel G., 2007. "Debt restructurings, holdouts, and exit consents," Journal of Financial Stability, Elsevier, vol. 3(1), pages 1-17, April.
    3. 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.
    4. Stephen J. Choi & Mitu Gulati & Robert E. Scott, 2018. "Variation in Boilerplate: Rational Design or Random Mutation?," American Law and Economics Review, American Law and Economics Association, vol. 20(1), pages 1-45.
    5. Giselle Datz, 2021. "Ties that bind and blur: financialization and the evolution of sovereign debt as private contract," Review of Evolutionary Political Economy, Springer, vol. 2(3), pages 571-587, December.
    6. Ola Bengtsson & Dan Bernhardt, 2014. "Different Problem, Same Solution: Contract‐Specialization in Venture Capital," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(2), pages 396-426, June.
    7. David A. Hoffman & Anton Strezhnev, 2022. "Leases as Forms," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 19(1), pages 90-134, March.

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