The Impact of Foreign Investors' Challenges of Domestic Regulations

42 Pages Posted: 1 Jun 2023 Last revised: 31 Aug 2023

See all articles by Mark G. Maffett

Mark G. Maffett

University of Miami - Department of Accounting

Mario Milone

University of California, San Diego (UCSD) - Rady School of Management

Weijia Rao

George Mason University - Antonin Scalia Law School

Date Written: May 18, 2023

Abstract

We examine the impact of foreign investors' ability to challenge allegedly harmful host-country regulations before an international arbitral tribunal under the investor-state dispute settlement (ISDS) provisions included in many international investment agreements. Consistent with widespread deterrent effects on costly domestic regulation, following an ISDS challenge, the equity values of firms in the industry affected by the challenged regulation increase significantly (by approximately 85 basis points in our baseline specification), particularly when large corporations challenge industry-level regulations for the first time. Domestic firms without ready access to ISDS also experience higher equity values, suggesting that our results are not driven by expectations of future awards of damages. In addition, we find that capital expenditures in the respondent country fall in the years before a case filing and then increase significantly afterward for firms in the case-affected industry. Taken together, our evidence suggests that ISDS enables foreign firms to deter domestic government regulatory interventions that decrease the profitability of investment.

Keywords: Investor-State Dispute Settlement, Stock Returns,Regulatory Environment, Spillover Effect, Foreign Investment

Suggested Citation

Maffett, Mark G. and Milone, Mario and Rao, Weijia, The Impact of Foreign Investors' Challenges of Domestic Regulations (May 18, 2023). University of Miami Business School Research Paper No. 4451762, Available at SSRN: https://ssrn.com/abstract=4451762 or http://dx.doi.org/10.2139/ssrn.4451762

Mark G. Maffett

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Mario Milone

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Weijia Rao (Contact Author)

George Mason University - Antonin Scalia Law School ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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