Can Network Effects Impede Optimal Contracting in Debt Securities?

Lars Hornuf and Andreas Engert

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: We examine network effects as an impediment to optimal financial contracting. In devising the terms of their transaction, the parties may prefer to conform to a market standard rather than matching their own contracting needs. To study this possibility, we investigate choice of contract law provisions in European debt securities. In order to disentangle network effects from the effects of substantive differences of contract laws, we take advantage of a natural experiment: In 1999, eleven countries adopted the Euro as an official currency. As a consequence, the investor base of European issuers expanded beyond their respective home states. We hypothesize that the demand for an international standard contract law increased as the national securities markets converged into a single Euro area market. Using a difference-in-difference approach, we show that there is a strong and significant shift to English law for debt securities in Euro area member states as compared to other European countries. Our results are robust to alternative hypotheses and various statistical tests. Choice of law in debt securities may follow a market standard rather than quality differences among the competing contract laws.

JEL-codes: G15 K12 L14 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-law and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79867

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