Abstract
Employing a unique sample of 2,849 tariff imposition announcements by and against the United States (U.S.) over the period from 2018 to 2019, this study analyzes the impact of recent tariff announcements on share prices from 859 U.S. companies. We provide evidence for negative (cumulative) average abnormal stock returns due to tariff announcements during a symmetric three-day event window. We suggest that stock market investors expect adverse impacts of tariff impositions, e.g. a decrease in the companies' future cash flows and a threat of retaliation. The negative wealth effects are observed irrespective of whether the Trump administration announces safeguard tariffs to protect domestic firms or a retaliation is declared by foreign countries. Moreover, building several subsamples, we find that the adverse impact is mostly driven by announcements involving China and is associated with a variety of sector, tariff, trade and firm characteristics.
Highlights
Our results suggest that the announcement of tariffs is weighing on U.S stock market investor’s perceptions (Pastor and Veronesi, 2012, 2013) by potentially eroding confidence, raising concerns about the economic consequences for affected companies and reflecting fears of retaliatory tariffs and escalating tensions
Employing 2,849 tariff imposition announcements by and against the U.S targeting stocks issued by 859 U.S companies over the period from 2018 to 2019, the study at hand investigates if tariff announcements may induce abnormal share price reactions
Implementing an event study methodology, our analysis initially reveals negative average abnormal stock returns during a symmetric three-day event window due to tariff announcements
Summary
Roosevelt signed the Reciprocal Trade Agreements Act in 1934, and especially after the Second World War, the United States (U.S.) were one of the driving forces to encourage international efforts to reduce trade barriers and integrate markets. The process of opening world markets and expanding trade led to a prosperous international trading system with the U.S as the world’s largest national economy and leading global trader. U.S companies improved their productivity, efficiency and competitiveness by importing low priced intermediate goods and high quality inputs (Executive Office of the President of the United States, 2015).
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