Using Equity Market Reactions to Infer Exposure to Trade Liberalization
84 Pages Posted: 19 Aug 2020
Date Written: July 1, 2020
We outline a method for using asset prices to identify firm exposure to changes in policy. We highlight the benefits of this approach for studying trade agreements and apply it to two US trade liberalizations, with China and Canada. We find that abnormal equity returns during key events associated with these liberalizations are correlated with standard measures of import competition, vary across firms even within industries, predict subsequent firm outcomes, and provide a more complete view of distributional implications. In both cases, predicted relative increases in operating profit among the very largest firms dwarf the relative losses of smaller firms.
Keywords: International Trade, Trade Policy, PNTR, CUSFTA, NAFTA, Event Studies
JEL Classification: F13, F14, G14, G12, E00
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