Innovation in Boilerplate Contracts: An Empirical Examination of Soverign Bonds

Network externalities may lead contracting parties to stay wiht 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 (1) standardization may lead parties to adopt provisions not necessarily out of preference and (2) 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 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 sovereigns 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 unanimous actions clauses toward collective action clauses. We also report evidence that issuers\u27 attorneys dealing with a high volume of sovereign offerings were the driving factor behind the delayed, large shift in contract terms. For most lawyers, the task of reading and revising a boilerplate contract holds less attraction than a visit to the dentist\u27s office. That is why one of the perks of seniority at a law firm is being able to delegate the update this old contract for our client task to the most junior associate. After spending at least one frustrating and sleepless night unsuccessfully trying to decipher what the contract language means, the associate slowly begins to grasp the beauty of the boilerplate. And that beauty lies in the realization that there is no need to understand the specifics of what the contract provisions say. Afer all, it is a boilerplate