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Globalization and stock price crash risk: evidence from the US granting permanent normal trade relations to China

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  • Jieying Hong

    (Beihang University)

Abstract

China’s remarkable growth in exports has sparked concerns regarding the negative effects of the China trade shock; yet its positive aspects often go overlooked. This study uncovers a previously unexplored advantage of the China trade shock – its positive influence on financial stability. We focus on its influence on the stock price crash risk of US firms by leveraging the US granting of Permanent Normal Trade Relations (PNTR) status to China in 2000 as a quasi-natural experiment. Our study identifies a reduction in stock price crash risk for US firms after PNTR. This result remains robust after controlling for various other contemporaneous policies that may be spuriously correlated with the PNTR shock, such as the Sarbanes–Oxley Act, the burst of the Internet bubble in 2000, and policy changes in China. Further examination of the effects of PNTR on Chinese imports, earnings management, investment efficiency, and governance, along with an analysis of cross-sectional variations, indicates that the disciplinary channel, as opposed to the offshoring channel, is likely the primary underlying mechanism. This study enriches our understanding of the consequences of the China trade shock.

Suggested Citation

  • Jieying Hong, 2024. "Globalization and stock price crash risk: evidence from the US granting permanent normal trade relations to China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 55(8), pages 997-1019, October.
    • Handle: RePEc:pal:jintbs:v:55:y:2024:i:8:d:10.1057_s41267-024-00697-4
    DOI: 10.1057/s41267-024-00697-4
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