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Hedging Along the Global Value Chain: Trade War and Firm Value

Author

Listed:
  • Liyan Han
  • Lei Li
  • Huiyi Liao
  • Libo Yin

Abstract

We study the asset pricing implications of firms’ participation in the global supply chain. A firm’s global sourcing strategy serves as an option to hedge its value against trade shocks. Higher output tariffs increase firm value through reduced import competition, whereas higher input tariffs decrease firm value through higher input costs. The negative effects of input tariffs are more substantial for firms more reliant on foreign suppliers. We test the theoretical predictions in the context of the US-China trade war and quantify the impact of trade protectionism on Chinese firm value. One standard deviation increase of input tariff reduces the daily stock return by 0.12 percent for firms importing inputs, more than offsetting the gains from raising output tariffs by one standard deviation. The negative effect of input tariffs is larger for firms with high import intensity and low import substitutability. The welfare loss of the Chinese retaliatory tariffs was as much as $5.50 billion, 0.81% of the total value added of Chinese listed firms.

Suggested Citation

  • Liyan Han & Lei Li & Huiyi Liao & Libo Yin, 2024. "Hedging Along the Global Value Chain: Trade War and Firm Value," CRC TR 224 Discussion Paper Series crctr224_2024_531, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2024_531
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp531
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    References listed on IDEAS

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    1. Andrew N. Greenland & Mihai Ion & John W. Lopresti & Peter K. Schott, 2020. "Using Equity Market Reactions to Infer Exposure to Trade Liberalization," NBER Working Papers 27510, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Trade War; Global Supply Chain; Firm Value;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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