Do International Rulings Have Spillover Effects? The View from Financial Markets

Tuesday March 3rd at 12:30pm, Nuffield will host Krzysztof Pelc, William Dawson Scholar Associate Professor at McGill University in the Clay Room at Nuffield. Krzysztof will be presenting recent work with Jeff Kucik on the effects of international legal rulings on financial outcomes. 

Abstract: Can the rulings of international courts reach beyond a given case, and affect the behavior of countries not party to the dispute? International law itself is clear on the matter: rulings have no formal authority beyond the case at hand. This is consistent with the incentives of sovereign states wary of delegating too much authority to courts. Yet growing anecdotal evidence suggests otherwise. Our claim is that even in the absence of formal authority, the rulings of international courts can affect behavior by mobilizing pro-compliance groups in countries not party to the dispute. We test these beliefs on World Trade Organization disputes through a novel approach. Since WTO rulings have implications for the fortunes of publicly traded firms, we examine whether financial markets bet on there being spillovers beyond the case at hand. When we look at a set of WTO rulings bearing on solar energy production, we find that Indian markets react to rulings against Canadian measures similar to those Indian firms benefit from. In a second test, looking at commodities markets, spillovers also appear across different industries: a ruling against US cotton subsidies significantly affects the valuation of other commodities benefiting from similar subsidies. The spillover effects of international rulings may be a matter of scholarly contention, but their existence is something that financial markets appear willing to bet on.