Import Competition and the Stock Market Return to Capital

47 Pages Posted: 3 Oct 2007 Last revised: 4 Apr 2015

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Woodrow Wilson School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

James A. Levinsohn

University of Michigan; National Bureau of Economic Research (NBER)

Date Written: October 1987

Abstract

We measure the responsiveness of returns to capital invested in six U.S. industries to shocks to the prices of competing import goods. Recognizing that most capital services are not traded on spot rental markets, we treat the intersectoral mobility of capital as the outgrowth of investment behavior. Then the return to capital is realized as an asset return to equity holders. . We model expected returns by CAPM, and relate "excess" returns in a period to unanticipated shocks to the variables that affect current and future profits. We find that positive shocks to import prices cause higher than normal stock market returns in all six industries. The magnitudes of the responses are consistent with the hypothesis that capital is highly sector specific in five of these industries.

Suggested Citation

Grossman, Gene M. and Levinsohn, James A., Import Competition and the Stock Market Return to Capital (October 1987). NBER Working Paper No. w2420, Available at SSRN: https://ssrn.com/abstract=349225

Gene M. Grossman (Contact Author)

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