Using Equity Market Reactions to Infer Exposure to Trade Liberalization Andrew Greenland∗ Mihai Iony John Loprestiz Peter K. Schott§ First Draft: June 2018 This Draft: June 2019{ Abstract We develop a method for identifying firm exposure to changes in policy using ab- normal equity returns, and employ it to study US trade liberalization with China. Abnormal returns surrounding the liberalization’s passage into law vary substantially even within industries, are correlated with but have explanatory power beyond tradi- tional measures of import competition, and predict sharper relative changes in operating profit, employment and capital than abnormal returns during randomly chosen days. Predicted relative increases in operating profit among the very largest firms swamp the losses of smaller firms, providing further insight into this liberalization’s distributional implications. ∗Martha and Spencer Love School of Business, Elon University;
[email protected] yEller College of Management, University of Arizona;
[email protected] zThe College of William & Mary;
[email protected] §Yale School of Management & NBER;
[email protected] {We thank Kerem Cosar, Teresa Fort, Justin Pierce and seminar participants at CUHK, Elon University, the Fed Board, Hitotsubashi, LSE, the Mid-Atlantic Trade Workshop, UNC Chapel Hill, the University of Toronto and the University of Tokyo for helpful comments and feedback. 1 Introduction We propose a method for measuring firm exposure to changes in policy. Our approach is based on financial markets’ reactions to key events associated with the new regime, e.g., the legislative votes during which it becomes law, and assumes that all new information relevant for firm value is fully reflected in its stock price.