Bondholders vs. Direct Investors? Competing Responses to Expropriation

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.