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Heterogeneous Firm-Level Responses to Trade Liberalisation: A Test Using Stock Price Reactions

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  • Holger Breinlich

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.

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Bibliographic Info

Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1085.

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Date of creation: Nov 2011
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Handle: RePEc:cep:cepdps:dp1085

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

Related research

Keywords: Heterogeneous firm models; stock market event studies; Canada-U.S. free tradeagreement;

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  1. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
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Cited by:
  1. David Reinstein & Joon Song, 2014. "Listen to the Market, Hear the Best Policy Decision, but Don't Always Choose it," Economics Discussion Papers 748, University of Essex, Department of Economics.

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