The Determinants of the Cost of Capital: Case Study Evidence

Paolo Mauro, Nathan Sussman and Yishay Yafeh

in Emerging Markets and Financial Globalization

Published in print March 2006 | ISBN: 9780199272693
Published online May 2006 | e-ISBN: 9780191603488 | DOI:
 The Determinants of the Cost of Capital: Case Study Evidence

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This chapter conducts a case study of spreads on sovereign bonds issued by Japan and Russia, two countries that introduced the gold standard in 1897. It is shown that Japanese spreads were relatively unaffected by the establishment of some of Japan’s most important institutions, including the promulgation of the Meiji Constitution in 1889, which explicitly guaranteed the protection of property rights and the rule of law. The only institutional reform that led to an immediate improvement in Japan’s ‘credit rating’ was the adoption of the gold standard. Japan’s war with Russia (1904-1905) and its successful outcome had a far more visible impact on spreads than most institutional reforms. The chapter also conducts a case study of the British-Dutch interest differential around the Glorious Revolution. It shows that developments regarding war and peace had a far greater impact on borrowing costs than institutional reforms.

Keywords: gold standard; Russia; Japan; Meiji; property rights; reforms; institutions; Glorious Revolution; Russo-Japanese war

Chapter.  3995 words.  Illustrated.

Subjects: Financial Markets

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