The Sovereign Debt Listing Puzzle

Abstract

The claim that stock exchanges perform certification and monitoring roles in securities offerings is pervasive in the legal and financial literatures. This article tests the validity of this “bonding hypothesis” in the sovereign-bond market — one of the oldest and largest securities markets in the world. Using data on sovereign-bond listings for the entire post-World War II period, we provide the first comprehensive report on sovereigns’ historical listing patterns. We then test whether a sovereign bond issue’s listing jurisdiction affects its yield at issuance, as the bonding hypothesis would predict. We find little evidence of bonding in today’s sovereign-debt market. Instead, we hypothesize that sovereign-bond listings are primarily a form of regulatory arbitrage. Because certain investors may be restricted to investing abroad only in listed securities, sovereigns are incentivized to list their bonds, but to seek out the least restrictive exchange that qualifies.