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Import Competition and the Stock Market Return to Capital

  • Gene M. Grossman
  • James A. Levinsohn

We measure the responsiveness of returns to capital invested in six U.S. industries to shocks to the prices of competing import goods. Recognizing that most capital services are not traded on spot rental markets, we treat the intersectoral mobility of capital as the outgrowth of investment behavior. Then the return to capital is realized as an asset return to equity holders. . We model expected returns by CAPM, and relate "excess" returns in a period to unanticipated shocks to the variables that affect current and future profits. We find that positive shocks to import prices cause higher than normal stock market returns in all six industries. The magnitudes of the responses are consistent with the hypothesis that capital is highly sector specific in five of these industries.

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File URL: http://www.nber.org/papers/w2420.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2420.

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Date of creation: Oct 1987
Date of revision:
Publication status: published as American Economic Review, Vol. 79, No. 5, pp. 1065-1087, (December 1989).
Handle: RePEc:nbr:nberwo:2420
Note: ITI IFM
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  2. Gibbons, Michael R, 1987. "The Interrelations of Finance and Economics: Empirical Perspectives," American Economic Review, American Economic Association, vol. 77(2), pages 35-41, May.
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  12. Mayer, Wolfgang, 1974. "Short-Run and Long-Run Equilibrium for a Small Open Economy," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 955-67, Sept./Oct.
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