Do Country-Level Investor Protections Impact Security-Level Contract Design? Evidence from Foreign Bond Covenants

Better legal protection of investors in a country is a central theme of international corporate governance research. However, investor protections can be derived not only from legal rights provided by countries’ laws but also from rights attached to individual securities at the issuer’s discretion. Using a cross-country sample of restrictive covenants attached to public corporate bonds, we show that countries’ legal investor protections impact security level contract design. When the legal protection of investors in a country is weak, investors are more likely to require security level protections that limit potentially opportunistic actions of managers. The findings suggest that sophisticated issuers and investors can create international contracts that adapt to weak legal institutions and therefore add to our understanding of how the overall investor protection environment is formed