Using Equity Market Reactions to Infer Exposure to Trade Liberalization
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 largest firms dwarf the relative losses of smaller firms.
We thank Kerem Cosar, Teresa Fort, Justin Pierce, Dan Trefler and seminar participants at ASSA, CUHK, Elon University, the Fed Board, FREIT, the Harvard/MIT macroeconomics seminar, Hitotsubashi, LSE, the Mid-Atlantic Trade Workshop, the NBER ITI, Princeton University, Purdue University, UNC Chapel Hill, the University of Chicago, the University of Toronto and the University of Tokyo for helpful comments and feedback. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.