Innovation in International Law and Global Finance : Estimating the Financial Impact of the Cape Town Convention

This paper examines the financial impact of a transfer of legal sovereignty covering the rights to collateral to an international regime in the case of the Cape Town Convention and Protocol covering international mobile assets, specifically commercial aircraft and related equipment, which came into force in 2004. We estimate the impact on financing costs facing airlines based in signatory countries in terms of access to financial markets and interest differentials, debt rating migration and stock prices using rating-sensitivity analysis, OLS regressions and event studies. We find that the present value of the resulting financing cost reductions are very significant and are biased in favor of developing countries, the sources of much of the growth in demand for commercial aircraft going forward. The results suggest the power of changes in the legal framework of financial markets to influence the costs and pricing of global financial flows.