Legal Credibility as a State Variable: Dispute Exposure and the Transmission of Monetary Shocks into Private Capital Markets

Abstract

This thesis asks how external financial shocks are transmitted into cross-border private-capital activity, and whether that transmission depends on host-country institutional credibility. The core argument is that when monetary conditions tighten and capital becomes scarce, investors place greater weight on whether their rights will remain enforceable under stress. In private capital, where each transaction is a discrete, long-horizon allocation decision, that concern should appear directly in deal-level allocation choices rather than only in asset prices. Using a country–year panel of 76 host countries from 2000 to 2022 that combines deal-level private-capital data from S&P Capital IQ with investor–State dispute records, governance indicators, and alliance data, I estimate two-way fixed-effects interaction models of heterogeneous shock transmission. I find that accumulated investor–State dispute exposure is the strongest predictor of vulnerability under monetary tightening. A country with 10 accumulated disputes facing a two percentage point federal funds rate increase experiences approximately 7.8% fewer deals, 24.2% less capital deployed, and an 11.4% narrower investor base relative to an otherwise identical zero-dispute country. This result holds across twelve robustness specifications and a permutation test with empirical p = 0.015. I also find that private equity and venture capital belong within the global financial cycle: a 10% increase in U.S. capital exports is associated with a 0.7% increase in host-country deal activity. I argue that Bilateral Investment Treaty (BIT) coverage and geopolitical alignment do not provide comparably robust insulation, while governance amplifies participation in capital-supply expansions more than it buffers adverse shocks. These findings identify legal-friction exposure as a state-contingent channel in shock transmission, especially when financial conditions tighten.