Bondholders vs. Direct Investors? Competing Responses to Expropriation

Abstract

We often presume that international financial actors have the same preferences, but this paper asks whether the property rights of foreign direct investors matter to sovereign bondholders. When governments expropriate direct investors, different investors' preferences could align over property rights issues. However, bondholders likely take positive signals if expropriation generates revenue for the state. Using a novel data set (1995–2011), I find that governments that earn revenue from expropriation can enjoy lower long‐term spreads on sovereign bonds. Although governments that expropriate lose out on FDI, they can benefit by generating revenue and enjoying rewards in sovereign debt markets. Unpacking investor preferences thus reveals gaps in market‐based informal property rights enforcement. When bondholders' and direct investors' preferences conflict, governments gain space to prioritize other goals over the protection of private property.

Firms and Global Value Chains: Identifying Firms’ Multidimensional Trade Preferences

“…Although firms in GVCs will still value freer trade, investment protection will be the most salient issue because a disruption at any point in the production network is likely to affect the profitability and even survival of the many firms involved. Thus, firms involved in global production networks will desire strong investment protection against any "expropriative motive" of foreign governments (Blanchard, 2010;Wellhausen, 2014Wellhausen, , 2015.…”

“…These latter types of policies have much more complicated implications for trade. Over the last several decades, scholars have carefully examined the political implications of each of these policy dimensions (Goodman, Spar, and Yoffie, 1996;Busch, 2007;Kucik and Reinhardt, 2008;Blanchard, 2010;Wellhausen, 2015). However, how interest groups evaluate a trade policy when a number of distinct issues are at stake simultaneously and how they consider each policy dimension in relation to the others remain understudied.…”

Oil and International Cooperation

“…To the extent that they need investments in their non-oil economy, they can use their repatriated oil revenues because most oil-rich states have difficulty absorbing these revenues domestically, and they often accumulate large sovereign wealth funds. Moreover, increased access to revenues is rewarded in sovereign debt markets, thus providing an alternative route to attract capital without the need to reassure investors about expropriation (Wellhausen 2015).…”

Political Risk Insurance: A New Firm-level Data Set

“…On the one hand, policy makers who face an economic crisis could place restrictions on convertibility to prevent capital flight. Crises can also reduce government receipts, and foreign investors can be attractive targets for revenue generation (Wellhausen 2015a). On the other hand, Abiad and Mody (2005) find that crises are often connected to liberalization, and Jensen et al (2012) argue that economic crises can make leaders more responsive to reputation concerns, which would make them less likely to expropriate.…”