Trade Networks and Firm Value: Evidence from the US-China Trade War
69 Pages Posted: 26 Aug 2018 Last revised: 28 Sep 2019
Date Written: September 10, 2019
This paper evaluates the financial implications of policy shocks for global production networks. We exploit various announcements of tariff hikes across a wide range of goods by both the US and Chinese governments in 2018-2019 as events, starting with the presidential referendum issued by the Trump administration on 22 March 2018, to study the impact of trade policy shocks on firms’ stock market performance. Using various novel datasets, we document significantly heterogeneous responses by firms to the announcements, depending on their direct and indirect exposure through global value chains to US-China trade. In particular, US firms that are more dependent on exports to and imports from China have lower stock returns and higher default risks around the announcement dates, while reduced import competition from China plays a limited role. Consistent patterns of stock price reactions are also found among Chinese firms. Two reverse experiments in 2019 further validate how the complex structure of global trade determines firms’ stock market reactions to policy shocks.
Keywords: firm value, event study, trade policy, offshoring, global value chains
JEL Classification: F10, G12, G14, O24
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