Capital Market Incentives, Regulatory Chill, and Investor-State Arbitration

We explore a previously under-explored channel for corporate influence over foreign government policy making: Investor-State Arbitration, and investigate the influence of capital market incentives on firms’ regulatory chilling behavior. We posit that access to capital market resources and myopic incentives provide public firms with means and incentives to challenge bona fide regulatory measures through investor-state arbitration. Consistent with this hypothesis, we find a firm being public is positively associated with the likelihood of the challenged measure being an industry-wide regulation in investor-state arbitration. We also find that these disputes take longer to be resolved as compared to those initiated by private firms, consistent with the assumption that public firms bring these cases for regulatory chill purposes. Finally, we exploit plausibly exogenous variation in securities regulation, which impose higher compliance burdens designed to restrain public firms’ myopic incentives, and find that public firms become less likely to bring investor-state claims against industry-wide regulatory measures.