investors who held bonds governed by foreign law fared significantly better than those investors who
held bonds governed by domestic law.
In this article, we take a broader view of the question by looking at a fuller set of salient local and
foreign parameters in the typical bond, doing so over a quarter century of data for the entire global
market, and comparing bonds issued in different currencies. Our contribution to the literature on
sovereign debt is threefold. First, we examine a much larger sample in terms of the number of
sovereigns, the number of bonds, the number of bonds per sovereign and the time period covered than
appears in the existing literature. Second, we focus on when-issued prices as opposed to prices in the
secondary market. Relying on pricing at issuance allows us to measure how investors price local-
versus foreign-parameter debt ex ante—that is, prior to any eminent threat of financial distress. Third,
we examine several parameters simultaneously as opposed to examining only one parameter in
isolation. More broadly, and beyond the sovereign debt literature, we believe we have made a
contribution to the literature on the price impact of bond covenant provisions (e.g., Bradley & Roberts,
2015; Eichengreen & Mody, 2004).
As illustrated by the Greek experience, having its debt governed by local law gives a sovereign
debtor leeway in restructuring its debt in times of a crisis. A similarly powerful weapon is having the
debt denominated in local currency. As an historical matter, several governments in financial crisis
have exploited the fact that their debt was denominated in domestic currency and increased their money
supply in order to inflate their way out of their debt obligations (Gelpern, 2017; Reinhart & Rogoff,
2009 and 2011). If interest rate parity holds, there should be no difference in pricing between foreign-
currency and local-currency debt, after adjusting for expected inflation. Yet the interest rate parity
relation assumes no difference in credit risk. The question is thus how credit risk is affected by whether
the sovereign controls the currency in which the bonds are denominated.
Research on a sovereign's choice to denominate its debt in local or foreign currency has largely
focused on the fact that, until recently, many emerging market issuers have not been able to borrow in
anything but foreign currencies (Eichengreen, Hausmann, & Panizza, 2005). Another strand of the
literature focuses on the choice of foreign- or local-currency debt primarily from the sovereign's
perspective, weighing the numerous tradeoffs involved in selecting its aggregate debt mix (see Panizza,
2008 for an overview). Incorporating the investor perspective, there is some research indicating that
yields on domestic currency bonds are higher than those denominated in foreign currencies, but this
research has focused only on emerging market issuers and their choice of currency (see Gadanecz,
Miyajima, & Shu, 2014, for a review of this literature).
A third factor that may give a sovereign breathing room in times of crisis is having its bonds listed
on a local rather than a foreign stock exchange. Stock exchanges are the primary regulators of the
sovereign debt market and dictate the periodic disclosures that debtors must make to investors. Leeway
from the exchange in terms of what information the sovereign has to disclose and when it must be
disclosed could help buy the sovereign valuable time during a crisis. As best we are aware, however,
there is no research examining the pricing impact of foreign versus local listing in the sovereign debt
market. A related literature in the corporate area finds that firms’stock prices increase when they list
their stock in a foreign jurisdiction with stronger disclosure and investor protection requirements such
as the US (Doidge, Karolyi, & Stulz, 2004). One proposed rationale is that subjecting the firm to the
stricter listing and reporting requirements of the SEC and US exchanges can reduce the ability of
management to expropriate wealth from its stockholders (Karolyi, 2006; Witmer, 2006).
One might therefore presume that creditors would always prefer that sovereigns denominate their
bonds in foreign currencies, have them governed under foreign law, and list them on a foreign stock
exchange. After all, local-parameter debt gives the issuing sovereign a ‘home field’advantage in any
disputes with its investors. This is particularly true if the sovereign experiences financial difficulties
BRADLEY ET AL.