Trade Shocks and Investment Efficiency

54 Pages Posted: 25 Apr 2024

See all articles by Wenjing Li

Wenjing Li

Jinan University, School of Management

Yuanhuai Peng

Jinan University

Hanwen Sun

University of Bath, School of Management

Youchao Tan

Jinan University - Management School

Abstract

We examine how international trade shocks affect corporate investment efficiency. Using a novel pairwise firm-product level dataset in China, we find that the investment efficiency of target firms is significantly enhanced following the implementation of trade defense instruments (TDIs) in the form of antidumping, countervailing, and safeguard measures. The reduced free cash flow and increased competition stemming from TDIs enhance firms’ investment efficiency by discouraging corporate overinvestment, especially in firms with more financial constraints, higher agency costs, and higher ex ante industrial competition. The efficiency-enhancing impact is more pronounced in firms with stricter penalty and higher product value targeted. Taking together, these findings suggest Chinese target firms, in response to international trade shocks, alter their investment strategies and become more efficient.

Keywords: trade shocks, investment efficiency, free cash flow, industrial competition, overinvestment

Suggested Citation

Li, Wenjing and Peng, Yuanhuai and Sun, Hanwen and Tan, Youchao, Trade Shocks and Investment Efficiency. Available at SSRN: https://ssrn.com/abstract=4807931 or http://dx.doi.org/10.2139/ssrn.4807931

Wenjing Li

Jinan University, School of Management ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Yuanhuai Peng

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, 510632
China

Hanwen Sun (Contact Author)

University of Bath, School of Management ( email )

School of Management, University of Bath
Bath
Bath, BA2 7AY
United Kingdom

Youchao Tan

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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