Foreign-law premium for European high-yield corporate bonds

We provide novel evidence on importance of governing laws for returns of high-yield corporate bonds. Around 29% of sample bonds are governed by laws which are different from laws of issuers’ countries of domicile. The most popular foreign law is English, followed by New York, and German laws. The foreign-law bonds exhibit higher excess returns than their domestic-law counterparts. The effect of foreign law on excess returns increases with an increase in downside risk. This conditional effect is particularly evident for English foreign governing law. The results are robust to controls for endogeneity concerns, alternative proxies, and model specifications.