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    Bank of Finland, Rauhankatu 19 B, Helsinki

Josef Brada (Arizona State University & CERGE-EI):
Does Bilateral Investment Treaty Arbitration Have Any Value for Multinational Corporations?

Co-authors: Chunda Chen (Lamar University), Jingyi Jia (Southern Illinois University Edwardsville) and Ali M. Kutan (Southern Illinois University Edwardsville)

Abstract
The literature on the effects of bilateral investment treaties (BITs) relies on estimating the relationship between FDI flows and stocks and the existence of BITs. The results of these studies are both controversial and methodologically problematic. In this paper we take a different approach using event studies based on the premise that if arbitration under a BIT adds value to a firm that has been awarded judgment against a host country, then effective protection exists. Using a sample of approximately 40 firms from several different home countries, we estimate excess returns to their share price around the time of the arbitral decision. Firms that win in arbitration experience positive excess returns that are statistically significant while firms that lose in arbitration experience negative excess reruns. There is also some evidence that the stock market correctly anticipates these outcomes. We also examine the determinants of the size of excess gains.

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