Measuring the Economic Effect of Alien Tort Statute Liability *
Darin Christensen † and David Hausman ‡
First Draft: February 1, 2014
Current Draft: January 18, 2016
Abstract
In Kiobel v. Royal Dutch Petroleum Co., the U.S. Supreme Court dramatically restricted the
scope of the Alien Tort Statute, holding that the statute does not permit victims of human rights
abuses to sue foreign corporations for violations of international law that took place entirely
abroad. We draw on three unique characteristics of the decision to provide credible empirical
evidence of its effect on companies’ valuations. First, we show that extractive industry firms
with headquarters abroad experienced larger cumulative abnormal returns following the ruling. By contrast, similar U.S.-based firms—which generally remain subject to Alien Tort Statute
liability—did not benefit from the decision. Second, we demonstrate that foreign-based firms
benefited both on the final decision date and on the earlier date when the Court slated the case
for reargument on the issue of extraterritoriality. Third, we show that this effect varied with
the human rights records of host countries: mining firms based abroad with subsidiaries in
countries with poor human rights records benefitted most. Although our results cannot resolve
debates over the average merit of ATS suits, we do show that the Kiobel decision mattered: it
decreased the cost, for foreign firms with some presence in the United States, of doing business
under regimes with records of human rights violations.
*
We are especially grateful to Saumitra Jha for sparking our interest in the Alien Tort Statute and for his feedback on
earlier drafts. We are also grateful to Jennifer Martinez, Ashley Deeks, Francisco Garfias and two anonymous referees
for their feedback on earlier drafts.
†
Ph.D. Candidate, Department of Political Science, Stanford University, 616 Serra Street Room 100, Stanford CA
94305. Email: [email protected]. Darin acknowledges the support of the Stanford Graduate Fellowship.
‡
Corresponding author. J.D., Stanford Law School. Ph.D. Candidate, Department of Political Science, Stanford
University, 616 Serra Street Room 100, Stanford CA 94305. Email: [email protected].
1
1.
Introduction
In Kiobel v. Royal Dutch Petroleum Co., 133 S. Ct. 1659 (2013), the U.S. Supreme Court eliminated the most distinctive feature of the Alien Tort Statute: the ability of U.S. courts to hear lawsuits seeking damages for human rights violations that took place entirely abroad. Before Kiobel,
foreign plaintiffs could sue in U.S. court for abuses committed by foreign corporations in foreign
jurisdictions—as long as those plaintiffs could secure personal jurisdiction over an individual or
corporate defendant in the United States.1 After Kiobel, U.S. courts only have subject matter jurisdiction under the Alien Tort Statute if the relevant events had some significant connection to the
United States.2 This holding effectively insulates foreign firms from Alien Tort Statute liability, but
leaves the door open for suits against U.S. corporations where the illegal conduct—for example, the
planning of human rights violations—took place partly in the United States.
The private sector welcomed the Court’s decision in Kiobel; human rights advocates condemned
it. The United States Council for International Business hailed the decision (Market Wired, 2013),
and the Financial Times told its readers that “corporate lawyers the world over may be breathing a
sigh of relief over this one” (Pollack, 2013). Meanwhile, the president of Human Rights First said that
“[h]uman rights abusers may be rejoicing today” (qtd. in Liptak, 2013), and The New York Times’s
Editorial Board titled its April 17 column discussing the Kiobel ruling “A Giant Setback for Human
Rights” (The Editorial Board, 2013).
This public debate mirrored a longstanding academic debate over the effects of Alien Tort Statute
litigation. Some scholars have characterized the Alien Tort Statute as an important deterrent of human rights violations abroad (e.g., Herz, 2008; Chander, 2013; Leval, 2013). Others have questioned
the wisdom of extending jurisdiction abroad on both foreign policy and economic grounds (e.g.,
Hufbauer and Mitrokostas, 2003; Sykes, 2012).
We take advantage of Kiobel’s different implications for foreign and domestic firms to estimate
its economic effects. We find that foreign mining corporations with subsidiaries in countries with
records of human rights violations saw larger abnormal increases in their stock values in the days
after Kiobel; for similar U.S.-based companies, their subsidiaries’ locations had no bearing on their
performance.3 Mining and oil companies were targets in important Alien Tort Statute cases, so
1
Personal jurisdiction doctrine sometimes allowed suit against people and corporations with minimal contacts in
the United States. For example, in Wiwa v. Royal Dutch Petroleum Company, 226 F.3d 88 (2000), the Second Circuit affirmed the District Court’s denial of a motion to dismiss for lack of personal jurisdiction where the defendant’s
subsidiary had an investor relations office in New York.
2
“[E]ven where [Alien Tort Statute] claims touch and concern the territory of the United States, they must do so
with sufficient force to displace the presumption against extraterritorial application” (Kiobel, 133 S. Ct. at 1669).
3
Although parent companies are not typically liable for the torts of their subsidiaries, the financial health of their
subsidiaries affects their own expected returns. We discuss this point in more detail below.
2
we focus on this sector.4 Our results hold both for the date of the final decision and the date on
which the Supreme Court scheduled the case for reargument on the question of extraterritorial
jurisdiction. We do not find a similar divergence in CARs on randomly selected “placebo” dates
prior to the Court’s final ruling, suggesting that events (or differences across firms) that precede the
Court’s ruling do not account for our findings.
These results contribute to the empirical literature measuring the effects of procedural change,
as well as to the literature on the Alien Tort Statute. First, Kiobel, with its two important dates
and differing effects for foreign and domestic firms, creates an opportunity for convincing causal
inference about the economic significance of a change in a jurisdictional rule. Second, we find that
the expected cost Alien Tort Statute litigation was higher for corporations operating in countries
known to abuse human rights. Third, we confirm the hypothesis of several scholars that Kiobel
mattered more for foreign corporations than for those based in the United States, increasing the
asymmetry in expected liability between foreign and domestic firms.
2.
Background
2.1 The Alien Tort Statute (ATS) and Kiobel
Enacted as a section of the Judiciary Act of 1789, the Alien Tort Statute (28 U.S.C. §1350) grants
federal district courts subject matter jurisdiction over suits brought by aliens alleging international
torts. The statute was rarely invoked until 1980, when the Second Circuit held, in Filartiga v. PeñaIrala, 630 F.2d 876 (1980), that deliberate torture constitutes an international tort over which the
Alien Tort Statute grants jurisdiction. In Sosa v. Alvarez-Machain, 542 U.S. 692 (2004), the Supreme
Court recognized that the Alien Tort Statute may confer jurisdiction over some international human
rights violations, but narrowed the scope of acceptable ATS claims under customary international
law.
Under Filartiga and Sosa, foreign plaintiffs could sue foreign defendants for specifically defined
violations of customary international law committed abroad. Moreover, subsequent cases have allowed plaintiffs to sue not only individuals, but also corporations, under one of three conditions.
First, corporations may be held liable for directly violating jus cogens norms—norms of international
law so strong that they are universally accepted. Second, corporations may be liable for violating
human rights under color of state authority. Third, and most commonly, corporations may be liable
for aiding and abetting a state’s violation of international law.
4
According to Drimmer (2010, p. 123), “no sector has been more targeted by human rights lawsuits in US courts
than the extractive industry. In total, extractive companies are named as defendants in approximately 25 per cent of the
ATS cases brought in the US and many of the additional non-ATS human rights cases.”
3
These principles gave rise to what some commentators described as an “explosion” of ATS suits
against corporations (Sykes, 2012, p. 2198).5 That is something of an overstatement. Figure 1 shows
the annual number of Alien Tort Statute cases against corporations from 1960 to 2010; only in a
few years were more than 10 cases initiated. Moreover, Simpson (2009) provides a rare list of ATS
suits against corporations and finds that, of 156 cases filed since 1960, only two judgments had been
entered against corporate defendants, and there have been fewer than twenty settlements. Simpson
concludes that “the argument that the ATS litigation is financially ruinous for international businesses or a serious impediment to multinational operations is vastly overstated.”7
Figure 1: Corporate ATS Cases from 1960-2010
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15
Kadic
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Fillartiga
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Number of Cases
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10
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5
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0
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1960
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1970
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1980
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1990
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2000
2010
This figure plots the number of corporate cases brought each year under the ATS according to a list
published by The AmLaw Daily. The dashed, red lines mark important cases: Filartiga v. Pena-Irala,
630 F.2d 876 (2d Cir. 1980) mentioned above and Kadic v. Karadzic, 70 F.3d 232 (2d. Circ. 1995),
which held that individual non-state actors could be bound by the obligations of international law
(Kunstle, 1996).
5
The business press agreed. “Rather than fight lengthy battles in federal courts, as well as in the court of public opinion, [multi-national corporations] may curtail their investments in countries with less-than-perfect records in human
and labor rights and respect for political and environmental norms. . . Conservatively, we calculate that $55 billion of US
FDI could be deterred by ATS suits” (Hufbauer and Mitrokostas (2004, p. 246, 256)).6 Writing in the Harvard Business
Review, Schrage (2003, p. 16) took a similar tone, warning “that human rights claims should be a pressing concern to
every global company” (though he also notes that, as of writing, no financial award to plaintiffs had been granted under
the ATS).
7
Moreover, Simpson’s list does not give the impression that plaintiffs have been successful at shaking down MNCs
with frivolous claims. Consider the two judgments against corporations under the ATS: first, a Cuban company conspired with the government to forcibly transport citizens and hold them captive, forcing them to work on repairing
ships and oil platforms; second, a Bangladeshi company hired a police unit to torture and extort the plaintiff. These are
not instances of opportunistic plaintiffs but real victims of human rights violations.
4
Kiobel, handed down on April 17, 2013, significantly reduced the reach of the Alien Tort Statute.
The Court first heard oral argument in Kiobel in February 2012 on the question of whether corporations may be subject to tort liability under international law. On March 5, 2012, however, the Court
put off the case to the next term and issued a surprising order directing the parties to brief the question of whether the Alien Tort Statute provides jurisdiction over international torts that take place
entirely abroad. The decision to recalendar the case led many commentators to expect the Court’s
eventual decision to strip the ATS of extraterritorial application. Stories announcing the Court’s order in both the New York Times and Wall Street Journal suggested that the move signaled the justices’
intention to limit the scope of the ATS (Liptak, 2012; Bravin, 2012). We therefore examine investors’
reactions on both the date of that order and the date of the final opinion.
Kiobel made clear that the ATS no longer allows plaintiffs to recover for conduct by foreign corporations, on foreign territory, harming foreign citizens. Such cases are sometimes called foreigncubed cases (Walsh, 2013). Foreign-squared cases, by contrast, in which either the plaintiff, the
defendant, or the territory is domestic, remain possible, so long as the “claims touch and concern
the territory of the United States . . . with sufficient force to displace the presumption against extraterritorial application” (Kiobel, 133 S. Ct. at 1669).
In other words, the Court’s opinion created two groups of corporations: U.S.-based firms still
potentially liable under the ATS and foreign firms operating abroad that can no longer be sued in
U.S. courts. To test whether the decision actually mattered, we test whether it affected these firms
differently. We focus on the stock returns of mining firms—both those based in the United States and
those based outside the country—before and after the Court’s decision. We concentrate on mining
firms because several prominent Alien Tort Statute suits have targeted such firms. We find that the
domicile of the firm does indeed matter: firms based abroad and with subsidiaries in countries with
poor human rights records enjoyed larger abnormal returns after Kiobel, relative to firms in the
United States with subsidiaries in similar countries.
Of course, the domicile of a corporation is not a perfect indicator of liability risk: after Kiobel,
a London-based corporation may still be liable for human rights abuses if they were planned in a
U.S. office, and a U.S.-based firm may not be liable if its abuses were committed entirely by offices
abroad. Since we are measuring the effect of the decision as understood by investors, this simple
interpretation of the decision may be the most relevant one. Moreover, this imperfect match should
bias against our results.
5
2.2
Previous Literature on the ATS and Deterrence
Our findings—that Kiobel led to increased returns for foreign firms, and that these returns varied with the human rights records of the subsidiaries’ host countries—make three contributions to
the academic and public debate.
First, we show that Alien Tort Statute liability was economically significant. This finding puts
to rest conjectures that “the Kiobel ruling should not matter to corporations because they would be
mindful of human rights even without legal obligation” (Chander, 2013, p. 832). Although Chander
mentions this hypothesis only to refute it, there are other plausible reasons to expect Kiobel to have
had little effect. Previous studies of significant changes in procedural rules have found comparatively
small effects. By contrast, we find that Kiobel had a statistically and economically significant realworld effect: it raised relative returns for foreign firms operating in countries with poor human
rights records.
Second, we show empirically that Kiobel increased the asymmetry between foreign and U.S.
firms in the risk of Alien Tort Statute liability: after Kiobel, foreign firms face little risk of Alien
Tort Statute liability, whereas U.S. firms continue to face substantial risk (Chander, 2013, p. 830832). Sykes (2012), who offers a nonempirical economic analysis of the costs and benefits of Alien
Tort Statute liability, identifies two potential problems with this difference in liability risk. First, if
the Alien Tort Statute raises the costs of human rights compliance for U.S. firms but not for foreign
firms, then foreign firms will simply take the place of U.S. firms in poor human rights environments
(Sykes, 2012, p. 2195-2196). Second, Sykes argues that this difference in liability risk may cause firms
to undergo costly restructuring, moving sensitive operations out of reach of suit in the U.S. (Sykes,
2012, p. 2195). If Sykes is right that the Alien Tort Statute imposed such costs—we take no position
on this question—then Kiobel increased them, since it increased relative returns for foreign firms,
but not firms based in the United States, operating in countries with poor human rights records.
Third, these findings fit into a broader literature on the effects of changes in procedural and jurisdictional doctrine (Lax and McCubbins (2006) offer a useful recent example). Many of the effects
of changes in procedural doctrine may be unobservable in case-level data because the litigants may
dynamically adjust, filing more or fewer cases in response to the change. For example, perhaps the
most credible empirical study of the effects of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)—
the watershed case that allowed federal district court judges to dismiss complaints when the facts
alleged were implausible—modeled litigant behavior in order to set a lower bound on the share of
negatively affected cases (Gelbach, 2012; Engstrom, 2013). We use an alternative method, exploiting the differing effects of jurisdictional change on different potential defendants–here, foreign and
domestic firms.
6
3.
Hypotheses
Which corporations likely benefited from Kiobel? First, companies operating in countries with
poor human rights records. Alien Tort Statute claims typically allege that a company has aided and
abetted abuses by a state (Branson, 2013, p. 232). Further, in countries with strong human rights
records, victims may be able to seek redress domestically rather than to sue in U.S. court under the
Alien Tort Statute.
Second, foreign firms should have benefited more than domestic ones. As several commentators
have pointed out (e.g., Chander, 2013), Kiobel mostly reduced the risk of ATS liability for foreign
firms. Companies based in the United States continue to face the risk that a plaintiff will establish
some link between actions taken in the United States and the alleged international tort. Companies
based outside of the U.S. should therefore have seen a reduction in liability risk and, consequently,
increases in their valuations.
For these reasons, we test two hypotheses:
H1: Firms operating in countries with poor human rights should experience relatively higher returns after Kiobel; and
H2: This effect should be concentrated among foreign firms.
Based in U.S.
Foreign
Poor Human Rights Record
No Change
↑ Returns
Good Human Rights Record
No Change
No Change
Table 1: Summary of Hypotheses
Table 1 presents these two hypotheses in a simple two-by-two table. We expect the largest stock
market gains for foreign firms with subsidiaries in countries with poor human rights records.
4.
Empirical Strategy
4.1
Calculating Cumulative Abnormal Returns
To test these hypotheses, we adopt methods from a growing literature in forensic economics that
uses event studies to measure companies’ involvement in political or illicit activities (Della Vigna
7
and La Ferrara, 2010). We calculate cumulative abnormal returns (CARs) for mining companies in
the 10 days immediately following the Court’s order recalendaring the case on March 5, 2012 as well
as its decision on April 17, 2013.8 A cumulative abnormal return is the sum of the difference between
a stock’s actual daily return and its expected return, where the expected return reflects the stock’s
correlation with a market index in a period before the event. In other words, the cumulative abnormal return is a measure of stock price change that controls for market trends and their likely effect
on the stock’s price. To calculate the cumulative abnormal return, we first estimate the expected
return:
bit = α
R
bi + βbi Rmt
(1)
bit denotes the expected return for firm i on day
where i indexes firms, and t indexes time in days. R
bmt denotes the return for the market index on day t. We use return data from 260 to 60 days
t; R
prior to the event to estimate (1). Second, we calculate
CARi =
T
X
bit =
Rit − R
T
X
ARit .
(2)
t=1
t=1
where T = 8 in the primary analysis.9
4.2
Empirical Models
After calculating the unweighted cumulative abnormal return (CARi ) for each company, we
test whether a company’s return depends on (a) whether it operates subsidiaries in countries with
poor human rights records and (b) whether the company is based in the United States. For both the
rehearing and final decision dates, we estimate
CARi = α + βzi + κ1(Foreign) + φ1(Foreign) ∗ zi + ΩXi + εi
(4)
8
Acemoglu et al. (2010) use a ten-day window in their recent study of whether Geithner’s appointment to Treasury
Secretary affected the stock prices of connected firms.
9
The event window includes ten calendar days but only eight trading days. In our online Appendix, we also employ
the test statistic,
√
τi = T CARi / SD(ARit ),
(3)
which weights each observation by the inverse of the standard deviation of abnormal returns. (Note that T , which is
determined by the length of the event window, is the same across firms.) This downweights observations with more
volatile abnormal returns. While we do not further index by the event, e, in the description above, CARi and τi are
both firm- and event-specific measures. In the online Appendix, we show that these two measures yield qualitatively
similar results; otherwise, we report results with the cumulative abnormal return (CARi ) as the dependent variable.
8
where zi denotes the measure of the human rights record of the subsidiaries’ host countries, and Xi
denotes other firm characteristics. Based on our hypotheses, we expect the κ to be positive and φ to
be negative: foreign companies should have seen larger CARs for any level of zi ; foreign companies
operating in countries with low human rights scores should have seen the largest CARs.
5.
Data
5.1
Company Sample
We use the Orbis database to find all publicly listed mining companies on the New York and London Stock Exchanges.10 The Orbis database includes several additional pieces of information: the
number of subsidiaries, the country that each subsidiary is located in, a more specific industry classification, and monthly market capitalization. Our search yields 371 firms with 11,746 subsidiaries.
We use the Yahoo Finance API and the ystockquote python module to extract stock prices
(i.e., adjusted closing price) for each company from March 12, 2011 until May 17, 2013 (Goldberg).
This provides a full year of price data prior to the Supreme Court’s order that the Kiobel case be
reargued.11 We also download prices over this same period for the S&P 500 and FTSE 100, which are
the market indices used to estimate (1) for companies listed in New York and London, respectively.12
5.2
Country-Level Human Rights Data
The human rights data come from the Cingranelli-Richards (CIRI) Human Rights dataset. We
use the most recent version of CIRI’s Physical Integrity Index from 2011 (Cingranelli and Richards,
2013). The Physical Integrity Index is an additive index that incorporates a government’s score on
disappearance, extra-judicial killing, political imprisonment, and torture variables.13 For clarity, we
refer to the index from now on simply as the human rights index. The index ranges from 0 to 8,
with zero representing frequent disappearances, extra-judicial killings, political imprisonment and
torture; 8 represents full respect for these rights.
10
We use NACIS code 21: Mining, Quarrying, and Oil and Gas Extraction to identify mining companies.
The required price data is not available for all 371 firms; we can estimate equation (1) for 324 and 343 firms for the
March 5 and April 17 events, respectively.
12
The S&P 500 index includes 500 large companies listed on the NYSE or NASDAQ, and the FTSE 100 index includes
the 100 companies listed on the LSE with the highest market capitalization. As several mining firms are included in the
FTSE 100, we also estimate (1) using the FTSE 250, which includes the 101st to 350th largest companies on the LSE. This
yields nearly identical results.
13
These variables are scored as follows: disappearance {0: frequent, 1: occasional, 2: no disappearances in countryyear}; extra-judicial killing: {0: frequent, 1: occasional, 2: no extra-judicial killings in country-year}; political imprisonment: {0: many; 1: few; 2: no persons imprisoned for their religious, political, or other beliefs in country-year};
torture: {0: frequent; 1: occasional; 2: no torture in country-year}.
11
9
The Orbis database provides information on each company’s subsidiaries and the countries
where these subsidiaries are located. For example, Ariana Resources PLC has a subsidiaries in the
United Kingdom (index: 7), the Netherlands (index: 8), Turkey (index: 2), and the British Virgin
Islands (no score). For each company, we compute the minimum human rights score across all
of the countries in which they operate subsidiaries. Following this logic, we would assign Ariana
Resources PLC a score of 2.14 In tables and figures, we refer to this score as the “Rights Index.”15
Although parent companies are not typically liable for the torts of their subsidiaries, the locations of subsidiaries are nonetheless a meaningful measure of potential Alien Tort Statute liability,
for at least two distinct reasons. First, when a subsidiary must pay damages, the parent company
suffers financial harm as well. Second, and more important, many Alien Tort Statute plaintiffs have
brought suit against parent (or even great-great-grandparent) corporations, alleging that the parent corporation aided and abetted the human rights violations of the subsidiary company and the
domicile country’s government (Branson, 2013, p. 232-235). Even when these suits have been unsuccessful for corporate law reasons, they have imposed litigation and publicity costs on those parent
corporations.16
For example, in Kiobel itself the plaintiffs alleged that Royal Dutch Shell cmpelled its Nigerian
subsidiary, Shell Petroleum Development Company of Nigeria, to commit human rights abuses
(Kearney, 2011). Similarly, in Sarei v. Rio Tinto PLC, 671 F.3d 736 (9th Cir. 2011), it was Rio Tinto’s
subsidiary, Bougainville Copper Limited, that was operating the controversial mining project in
Papua New Guinea. In sum, as Drimmer (2010, p. 126) observes, in ATS cases, “the fact that the
alleged acts were committed by, or attributed to, a foreign subsidiary of a US company has not
halted these actions from being brought.” The locations of subsidiaries are a reasonable proxy for
the Alien Tort Statute liability exposure of mining companies.
5.3
Summary Statistics
Table 2 reports summary statistics for the variables used in the subsequent analysis. The CARs
exhibit large outliers: firms, for example, that announce a major oil discovery in the event window.
Clearly, the stock prices of these firms are being generated by a very different process than the rest of
the data. In the subsequent figures and regression analysis, we trim the top and bottom half percent
14
A better measure of the human rights records of firms would weight the human rights records of subsidiary host
countries by the size of the subsidiary. Unfortunately, the Orbis database lacks information on the size of subsidiaries
for the large majority of firms and subsidiaries.
15
As a robustness check in the appendix, we also present our results using the average rather than the minimum
index value.
16
Branson (2013) offers a thorough treatment of the corporate-law obstacles to Alien Tort Statute liability for parent
corporations, as well as the possible ways around these obstacles.
10
of the data (i.e., one percent in total) to eliminate these observations and their undue influence on
the linear models.
Table 2: Summary Statistics
Variable
CAR (4/17)
CAR (3/5)
# Subsidiaries
1(Foreign)
Rights Index
n
Min
Med.
Mean
Max
SD
#NA
343
324
345
345
304
-0.6
-31.4
0.0
0.0
0.0
0.0
0.0
7.0
1.0
5.5
0.0
-0.1
33.9
0.6
4.2
2.5
1.2
1465.0
1.0
8.0
0.2
1.8
110.2
0.5
2.6
2
21
0
0
41
Data for the “Rights Index” is taken from from the 2011 Cingranelli-Richards Physical Integrity Index.
This variable represents the minimum score across all of the countries in which a company operates
subsidiaries. Data on mining companies and their subsidiaries comes from the Orbis database; stock
price data was accessed through the Yahoo Finance API. The CAR is computed using an event window
of 8 trading days.
6.
Analysis
6.1
Stock Returns for Companies That Have Faced Suit
Companies that actually faced Alien Tort Statute lawsuits should have benefited most from Kiobel. As a first check of whether our hypotheses are plausible, we look at stock prices for these companies in the days after Kiobel. Six companies in our sample faced suits as first defendants under the
Alien Tort Statute: Freeport McMoran Copper & Gold, Newmont Mining, Occidental Petroleum,
Rio Tinto, Royal Dutch Shell, and Tidewater.17 As expected, the average cumulative abnormal return across the six companies directly involved in ATS litigation is 0.03 (or roughly one third of a
standard deviation) larger than for the companies in the rest of the sample. However, this difference is not statistically significant, perhaps unsurprisingly given the heterogeneity across the 98%
of firms not listed as defendants in ATS cases.18
Figure 2 plots stock prices around the April 17, 2013 ruling for three companies: Royal Dutch
Shell Co. (RDS), Rio Tinto PLC (RIO), and Atlas Pipeline Partners (APL).19 Shell and Rio Tinto
were both sued under the Alien Tort Statute; by contrast, Atlas Pipeline faced no Alien Tort Statute
suits and operated entirely within the United States. Red dashed lines mark the start and end of the
ten-day event window used to estimate the cumulative abnormal returns.
We used a list of corporate Alien Tort Statute cases from 1960 to 2010 published by The AmLaw Daily. This allowed
us to extract the name of the first defendant.
18
The price series for Freeport and Occidental does not cover the full March 2011 to May 2013 span. However, we
were able to download a shorter price series and calculate the cumulative abnormal returns for these companies for the
17
11
Figure 2: Selected Firms’ Stock Prices during April 17, 2013 Event Window
Royal Dutch Shell Co.
Rio Tinto PLC
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Atlas Pipeline Partners
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34.0
2160
●
●
3000
●
●
●
●
●
●
Adj. Daily Close
●
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●
2900
●
2080
Adj. Daily Close
2950
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●
Adj. Daily Close
33.5
●
2120
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●
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●
33.0
●
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2850
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32.5
●
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2040
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●
2800
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●
●
●
●
●
Apr 15
Apr 22
Apr 29
(a) Royal Dutch Shell Co.
32.0
●
2750
Apr 15
Apr 22
(b) Rio Tinto PLC
Apr 29
●
Apr 15
Apr 22
Apr 29
(c) Atlas Pipeline Partners
These plots display the adjusted daily closing price from April 11 to May 4, 2014 for (a) Royal Dutch
Shell Co., (b) Rio Tinto PLC, and (c) Atlas Pipeline Partners. The first two firms were directly involved
in corporate ATS cases, and Atlas Pipeline Partners is a company that operates wholly within the U.S.
The April 2014 event window is demarcated by the dashed, red lines. Two important notes: (1) The
scale on the y-axis is not consistent across firms; and (2) the first red-dashed line denoting the start of
the event window is placed at April 18, 2013, which was the first full day of trading on the LSE after
the Kiobel ruling. Price data come from the Yahoo Finance API.
As expected, Royal Dutch Shell saw its stock prices increase following the case: between April
18 (the first full day of trading on the LSE after the Kiobel ruling) and April 29, RDS’s stock price
increased by five percent. By mid-May, the stock gained nearly ten percent over its April 18 closing
price.
The Supreme Court vacated the case against Rio Tinto five days after its Kiobel ruling, on April
22, 2013. Between April 18 and April 29, Rio Tinto’s stock price increased by three percent, and it
gained roughly 150 pounds per share in just the three days after the Supreme Court’s decision to
vacate its case. Despite these gains, Rio Tinto registered a cumulative abnormal return just below
the mean across companies in the sample. That is, given its relationship to the market index, we
might have expected Rio Tinto to do even better than it did within the event window.
Lastly, we plot the closing price for Atlas Pipeline Partners, a company that owns natural gas
processing facilities and interstate pipelines in the in U.S. We would not expect a firm that operates
wholly within the U.S. to be affected by the Court’s ruling and, as expected, Atlas Pipeline Partners
saw little movement in its stock price (the y-axis in figure 2(d) only runs from 32 to 34) and a CAR
of -0.001.
April 17, 2014 event window.
19
We include time-series plots for other companies listed as first defendants in ATS suits in the appendix.
12
6.2
Plotting the Data
We now turn to our sample of mining companies listed in New York and London. Figure 3 plots
cumulative abnormal returns against the minimum human rights score across subsidiary countries,
both for the full sample and then separately for companies with headquarters in the U.S. and abroad.
The linear fits in the plots suggest that returns were higher for companies with subsidiaries in abusive
countries, but only for companies based outside the U.S.
Figure 3: CARs for April 17, 2013 vs. Companies’ Exposure to ATS Claims
Foreign
0.2
●
0.0
●
●
●
●
●
●
●
●
Cumulative Abnormal Returns
Cumulative Abnormal Returns
0.2
US
●
●
0.0
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
−0.2
−0.2
Worst
2
4
6
Rights Index
Best
Worst
2
(a) Full Sample
4
6
Best Worst
Rights Index
2
4
6
Best
(b) U.S. vs. Foreign
These plots provide evidence for the two hypotheses. Firms operating subsidiaries in more abusive
countries (i.e., lower scores along the x-axis) experienced higher CARs following the April 17 ruling.
That effect was concentrated among foreign firms. The small points correspond to single companies
and are jittered horizontally. The larger points and ranges represent the averages and 95% confidence
intervals for each category of the independent variable. The dashed lines and gray areas represent the
95% confidence intervals from a bivariate regression. Data for the “Rights Index” is taken from from
the 2011 Cingranelli-Richards Physical Integrity Index. This variable represents the minimum score
across all of the countries in which a company operates subsidiaries. Data on mining companies and
their subsidiaries comes from the Orbis database; stock price data was accessed through the Yahoo
Finance API.
6.3
Regression Analysis
According to our first hypothesis, firms with subsidiaries in countries known to abuse human
rights should have experienced higher cumulative abnormal returns after Kiobel. In model 1 in
13
tables 3 and 4, the coefficient on the human rights index is negative and significant (or nearly significant). Companies with at least one subsidiary in countries with poor human rights records experienced significantly larger cumulative abnormal returns. Using the estimates from table 4, a one
standard deviation improvement in the minimum human rights index (2.5 points) is associated with
a 0.01 reduction in cumulative abnormal returns, or just over a tenth of a standard deviation. (In
an online appendix we estimate the same models with τ as the dependent variable; our results are
unchanged.)
Table 4: Regression Results for Ruling
(April 17, 2013)
Table 3: Regression Results for Rehearing (March 5, 2012)
Dependent variable:
Dependent variable:
CAR
CAR
(1)
Rights Index
−0.003
(0.002)
(2)
(3)
(1)
0.004
(0.003)
0.001
(0.004)
Rights Index
1(Foreign)
0.058∗∗∗
(0.021)
0.062∗∗∗
(0.021)
1(Foreign)
Rights Index
×1(Foreign)
−0.010∗∗
(0.005)
−0.008∗
(0.005)
Rights Index
×1(Foreign)
−0.009
(0.011)
−0.054∗∗∗
(0.016)
−0.031
(0.021)
289
0.004
289
0.014
X
279
0.052
Constant
Sub-Sector FE
Observations
Adjusted R2
Note:
Constant
Sub-Sector FE
Observations
Adjusted R2
(2)
(3)
0.002
(0.003)
0.001
(0.004)
0.003
(0.020)
0.003
(0.021)
−0.010∗∗∗
(0.004)
−0.008∗
(0.004)
−0.008
(0.009)
−0.010
(0.018)
0.003
(0.021)
299
0.009
299
0.078
X
287
0.080
∗∗
−0.004
(0.002)
∗
∗
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
Note:
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
Robust Std. Errors in parentheses.
Robust Std. Errors in parentheses.
Columns 1-3: OLS regressions, with the CAR using an event window of 8 trading days as the dependent variable. Data for the “Rights Index” is taken from from the 2011 Cingranelli-Richards Physical
Integrity Index. This variable represents the minimum score across all of the countries in which a
company operates subsidiaries. Data on mining companies and their subsidiaries comes from the
Orbis database; stock price data was accessed through the Yahoo Finance API.
Our second hypothesis posits that the Court’s actions should have had no effect on U.S. firms,
regardless of where their subsidiaries operate. Models 2 and 3 include an indicator for whether the
company is based outside the U.S. and interact this indicator with the human rights index. We expect that the coefficient on the interaction term should be less than zero (which we saw suggestive
evidence of in figure 3), and it is negative and significant in all models. The results suggest that
14
among U.S. companies there was no association between companies’ exposure to ATS claims and
their cumulative abnormal returns following the Court’s decisions. However, among foreign firms,
those operating in countries with poorer human rights records enjoyed a significantly larger bump
in their stock prices.20 A one standard deviation change in the minimum human rights score (2.5
points) is associated with a 0.02 reduction in cumulative abnormal returns in this subset of companies.
6.4
Robustness to Different Event Windows
While we follow the literature in defining an event window of between four and ten trading days
(Dube et al., 2011; Acemoglu et al., 2010), our decision to use eight trading days (ten calendar days) is
arbitrary.21 To assess whether our results are sensitive to this decision, we re-estimate model 2 from
tables 4 and 3 using event windows that vary from 1 to 15 trading days. We report the coefficient
estimates and 95% confidence intervals in figure 5. As is apparent from the figure, the estimates are
quite similar for windows that range from 6 to 10 trading days, suggesting that the results are robust
to different, justifiable choices about how to define the event window.
Moreover, the result is robust even for shorter event windows. Our estimate of φ̂ from Table 4,
Model 3 remains negative (as expected) using a one-day event window; the estimate is significant
at conventional levels when we employ event windows between two and nine days.
Nonetheless, we continue to expect (and find) the strongest results in event windows of five days
or more. This makes sense when we concretely consider how investors likely learned about the case.
Press reports suggest that investors abroad may not have immediately appreciated the implications
of the ruling. The Financial Times, for example, first briefly mentions the decision in the afternoon
on 18 April (a day after the decision); news would not then have appeared in the print edition until
two days after the ruling. Moreover, the suit against Rio Tinto was not vacated until five days after
the Kiobel decision. This event provided a clear indication to investors of how the ruling applied to
companies beyond Royal Dutch Shell.
Perhaps most important was the reporting from the Legal Monitor, a subscription legal information service for corporations and law firms. The Legal Monitor reported far more on the decision
20
The changes in the number of observations for model 3 results from dropping the following sub-sectors with three
or fewer firms: “Uranium”, “Support Mining”, “Fertilizer”, “Building Stone”, “Gravel and Sand”, “Salt.” Including these
categories introduces collinearity with the other independent variables and makes it impossible to estimate robust standard errors. Including these additional firms produces nearly identical coefficient estimates.
21
We chose the event window before performing this analysis. That is, we did not choose the duration that yielded
the largest or most precisely estimated coefficients.
15
than any other media outlet.22 Of 30 newspaper articles that mention the case between the date of
the decision (April 17, 2013) and April 30, 2013, 11 are from the Legal Monitor; no other outlet published more than two stories on the case during that period. Moreover, as a subscription service that
caters to corporate customers, it is particularly likely to have been read by investors.
The attention from the Legal Monitor tracks the effect on cumulative abnormal returns in the
period after the event. Three short articles appeared on April 17 and April 18 ; the attention continued
steadily after that, with longer articles on April 19, April 20, and April 22, April 23, April 25 and
April 26 (Legal Monitor Worldwide, 2013). Six of the eleven articles were published on or after April
22. This continuing attention suggests that information about the decision continued to become
available throughout a longer event window.
7.
Conclusion
This article offers a simple empirical test of the economic significance of a change in a jurisdictional rule. When the Supreme Court held, in Kiobel, that the Alien Tort Statute does not grant
subject matter jurisdiction over events occurring entirely abroad, investors noticed. Immediately
after both the order to rehear the case and the final decision, investors rewarded companies based
outside the United States and mining in countries with the worst human rights records.
Placebo tests suggest that these findings are not a product of chance. Furthermore, a back-ofthe-envelope calculation suggests that these effects are economically meaningful. Our estimates
from table 3 imply that, among firms operating in the worst human rights environments, foreign
companies enjoyed CARs that were 0.06 points larger than their U.S. counterparts. In March 2012,
the average market capitalization of this subset of foreign firms was 8.7 billion dollars. Multiplying
these figures, our results suggest that the Court’s decision led to a divergence in valuation of roughly
a half billion dollars.23
Investors expected Alien Tort Statute suits to matter economically, and to matter more the worse
the human rights records of the regimes under which mining companies operated. In other words,
the Alien Tort Statute increased the cost of doing business for mining companies in countries with
poor human rights records. The Supreme Court’s decision in Kiobel reduced that cost, but only for
foreign companies.
22
We conducted a search on Lexis Nexis for all newspaper mentions of “Kiobel” from April 17, 2013 to April 30, 2013.
Such estimates should be interpreted cautiously: the large firms that pull up the average market capitalization
tended to benefit less than smaller firms.
23
16
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19
A.
Time-Series Plots for Other Defendants in ATS Cases
Figure 4: Stock Price Series for Other ATS Defendants
Freeport McMoran
Newmont Mining
●
●
30
●
Adj. Daily Close
Adj. Daily Close
36
29
●
●
●
●
28
34
●
●
●
●
●
●
●
●
●
●
●
27
●
●
●
●
●
32
●
●
●
●
●
26
●
●
●
●
Apr 15
Apr 22
Apr 29
Apr 15
(a) Freeport McMaron
●
●
Apr 22
Apr 29
(b) Newmont Mining
Occidental Petroleum
Tidewater
●
●
●
87.5
●
52
●
●
●
85.0
82.5
Adj. Daily Close
Adj. Daily Close
●
●
●
●
●
50
●
●
●
●
●
●
●
●
80.0
●
●
●
48
●
●
●
●
●
●
●
●
77.5
Apr 15
Apr 22
Apr 29
Apr 15
(c) Occidental Petroleum
●
●
Apr 22
(d) Tidewater
Price data are from the Yahoo Finance API.
20
Apr 29
●
Robustness: Length of Event Window
Figure 5: Estimates Using Event Windows of Varying Length
φ^ from Model 3
0.01
0.00
−0.01
−0.02
1
2
3
4
5
6
7
8
Event Window Duration
9
10
9
10
(a) Rehearing: March 5, 2012
0.01
φ^ from Model 3
B.
0.00
−0.01
−0.02
1
2
3
4
5
6
7
8
Event Window Duration
(b) Ruling: April 17, 2013
This graph displays the coefficient estimates and 90% confidence intervals for Rights
Index×1(Foreign) from model 3 (labeled φ̂) using event windows that vary from 1 to 10 trading days. As is apparent from the figure, the estimates acheive conventional levels of significance
for windows ranging from 5 to 9 trading days, suggesting that the results are robust to reasonable
choices about how to define the event window. Data for the “Rights Index” is taken from from
the 2011 Cingranelli-Richards Physical Integrity Index. This variable represents the average score
across all of the countries in which a company operates subsidiaries. Data on mining companies and
their subsidiaries comes from the Orbis database; stock price data was accessed through the Yahoo
Finance API.
21
C.
Robustness: Alternative Independent Variable
Instead of using the minimum of the human right index across the host countries of a company’s
subsidiaries, we can instead employ the average. Our conclusions are unchanged, though the significance of our coefficients attenuates when we look at CARs following the decision to rehear the
case on March 5, 2012.
Table 6: Ruling (4/17/2013)
Table 5: Rehearing (3/5/2012)
Dependent variable:
Dependent variable:
CAR
CAR
(1)
Avg. Rights Index
−0.003
(0.005)
(2)
(3)
(1)
0.033
(0.034)
0.031
(0.041)
Avg. Rights Index
1(Foreign)
0.234
(0.208)
0.285
(0.245)
1(Foreign)
Avg. Rights Index
×1(Foreign)
−0.037
(0.035)
−0.043
(0.041)
Avg. Rights Index
×1(Foreign)
−0.006
(0.027)
−0.229
(0.206)
−0.210
(0.247)
Constant
289
−0.002
289
0.005
X
279
0.054
Constant
Sub-Sector FE
Observations
Adjusted R2
Note:
Sub-Sector FE
Observations
Adjusted R2
∗
(2)
(3)
∗
0.034
(0.020)
0.040∗
(0.021)
0.216∗
(0.122)
0.256∗∗
(0.128)
−0.043∗∗
(0.020)
−0.048∗∗
(0.021)
0.005
(0.020)
−0.204∗
(0.120)
−0.232∗
(0.127)
299
0.002
299
0.064
X
287
0.074
−0.005
(0.004)
∗
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
Note:
p<0.1; ∗∗ p<0.05; ∗∗∗ p<0.01
Robust Std. Errors in parentheses.
Robust Std. Errors in parentheses.
Columns 1-3: OLS regressions, with the CAR using an event window of 8 trading days as the dependent variable. Data for the “Rights Index” is taken from from the 2011 Cingranelli-Richards Physical
Integrity Index. This variable represents the average score across all of the countries in which a company operates subsidiaries. Data on mining companies and their subsidiaries comes from the Orbis
database; stock price data was accessed through the Yahoo Finance API.
22
D.
Placebo Tests
One might be concerned that the results reported in tables 3 and 4 are unrelated to the Court’s
actions, and we are mistaking coincidence for evidence. To evaluate this possibility, we draw 80
dates at random from November 2012 to April 2013 (to avoid incorporating stock returns from the
actual event windows), calculate cumulative abnormal returns, and reestimate models 1 and 3 from
table 4.
Figure 6: Distribution of Placebo Tests
0.015
3.00
t−stat(φ^) from Model 3
φ^ from Model 3
1.65
0.000
●
0.00
−1.65
Court Decision
Rehearing
Rehearing
●
−0.015
−0.005
Court Decision
−3.00
0.000
^
β from Model 1
0.005
−3.00
−1.65
0.00
1.65
^
t−stat(β) from Model 1
3.00
Models 1 and 3 from table 4 were re-estimated using 80 randomly selected dates that do not overlap
with the event windows associated with the Court’s actions. We plot the coefficients and t-statistics
on the Rights Index from model 1 (x-axis) against Rights Index:1(Foreign) from model 3 (y-axis). The
coefficients and t-statistics associated with the real rehearing and ruling stand out as the only jointly
significant estimates (or nearly jointly significant, in the case of the rehearing) at α = 0.1, suggesting
that the findings are not a product of chance. Rights Index numbers are from the 2011 CingranelliRichards Physical Integrity Index. Mining firms and subsidiary data are from the Orbis database, and
price data are from the Yahoo Finance API.
Figure 6 summarizes the results from these tests, plotting the coefficients on Rights Index from
model 1 (x-axis) and on Rights Index:1(Foreign) from model 3 (y-axis) for all placebo dates, as
well as the dates of the actual Court actions. As is apparent from the graph, our estimates fall in
the far left-tails of the coefficient distributions. Furthermore, the results from the actual rehearing
and ruling stand out as the only jointly significant (or nearly so for the rehearing date) estimates.
23
These placebo should alleviate readers’ concerns that events (or differences across firms) prior to the
Court’s decisions account for the effects we detect.
24