Two Papers on Puerto Rico's Debt Crisis

My dissertation utilizes the natural experiment of Puerto Rico's debt crisis in order to investigate the economic effects of (sub)sovereign default risk and the pricing of security contract provisions. The first chapter uses the interesting case of Puerto Rico to address the questions: do investors price contract provisions and the related law? Does the pricing of contract provisions vary with credit risk? Puerto Rico provides an interesting case allowing the study of three different types of contract provisions in the presence of high and increasing credit risk; a strong legal system; and rich data to select well matched control groups. I find that investors indeed price contract provisions specifying governing law, securing debt with specific revenues, and including collective action clauses. I also find that investors especially price these contract provisions when credit risk is highest. The second chapter uses Puerto Rico's unique characteristics as a U.S. territory to examine the real effects of (sub) sovereign default risk. In the post-2012 period of increased default probabilities, Puerto Rico spirals into a significant decline and the co-integrating relationship with real activity on the US mainland breaks down. Cross-industry variation in default risk exposure identifies significantly higher employment growth declines in external finance and government demand dependent industries. Using government bond yields and stock returns we confirm that news of increased default risk raises the cost of capital for the Puerto Rican government and for publicly traded Puerto Rican firms.Doctor of Philosoph