Impact of Domestic Investor Protection on Foreign Investment Decisions: Evidence from Bond Markets

Abstract

This study explores the relationship between domestic creditor protection and foreign investment decisions in bond markets. It also investigates how the difference between domestic and foreign creditor protections affects the foreign investment. The impact of domestic creditor protection on cross‐border investment in bonds is twofold. A high level of domestic creditor protection increases international diversification. At the same time, an efficient protection of creditor rights at home reduces the sensitivity of foreign investment to foreign creditor protection. These results hold most strongly for investing countries with high levels of domestic creditor protection. In addition, this study shows that the difference between domestic and foreign creditor protections matters for investment decisions: if domestic creditor protection is more efficient than foreign creditor protection, the sensitivity of foreign investment to foreign (domestic) creditor protection decreases (increases). Copyright © 2016 John Wiley & Sons, Ltd.