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Heterogeneous firm-level responses to trade liberalisation: a test using stock price reactions

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  • Breinlich, Holger
Abstract
This paper presents novel empirical evidence on key predictions of heterogeneous firm models by examining stock market reactions to the Canada-United States Free Trade Agreement of 1989 (CUSFTA). Using the uncertainty surrounding the agreement’s ratification, I show that the pattern of abnormal returns of Canadian manufacturing …firms was broadly consistent with the predictions of a class of models based on Melitz (2003). Increases in the likelihood of ratification led to stock market gains of exporting firms relative to non-exporters. Moreover, gains were higher in sectors with larger cuts in U.S. import tariffs. Decreases in the likelihood of ratification led to opposite stock market reactions. Results for the impact of Canadian tariff reductions are less conclusive but most specifications suggest that exporters also gained relative to non-exporters in response to such reductions. Translating stock market gains into implied profit changes, I find that CUSFTA increased expected per-period profits of exporters by around 6-7% relative to non-exporters.

Suggested Citation

  • Breinlich, Holger, 2011. "Heterogeneous firm-level responses to trade liberalisation: a test using stock price reactions," LSE Research Online Documents on Economics 121748, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121748
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    File URL: http://eprints.lse.ac.uk/121748/
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    heterogeneous firm models; stock market event studies; Canada-U.S. free trade agreement;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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