Capital Market Incentives and Regulatory Challenges in Investor-State Dispute Settlement

Abstract

We study a previously under-explored channel through which firms can exert influence over foreign governments’ policy-making—investor-state dispute settlement—and provide descriptive evidence of firms’ economic incentives. Guided by the theory on firms’ regulatory challenges, we find that a firm being public is positively associated with the likelihood that the challenged measure in investor-state dispute settlement is an industry-wide regulation. We also find that it takes significantly longer to resolve these cases when they are challenged by public companies as opposed to private companies. We further demonstrate that challenging foreign regulations is consistent with firms prioritizing domestic shareholder interests over foreign stakeholder interests, and that the financial stake of public firms in the industry reduces their free-riding incentives.