Working Paper: NBER ID: w2420
Authors: Gene M. Grossman; James A. Levinsohn
Abstract: 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.
Keywords: import competition; stock market; returns to capital
JEL Codes: F10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| import price shocks (P22) | stock market returns (G17) |
| capital specificity (D24) | responsiveness to import price shocks (F41) |
| less capital mobility (F21) | stronger relationship between import price shocks and stock returns (F14) |