How does international trade affect U.S. corporate investment? Evidence from the asset tangibility channel

We examine how international trade affects corporate investment through its impact on asset tangibility. We hypothesize that when foreign export reduces a domestic firm’s asset tangibility, the firm’s response of capital investment to internal funds decreases. Using 2SLS regressions, we first docume...

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Bibliographic Details
Published in:International review of economics & finance 2020-11, Vol.70, p.41-54
Main Authors: Burke, Qing L., Wang, Mengying, Xu, Xiaolu
Format: Article
Language:English
Subjects:
Asset tangibility
Capital investment
Competition
International trade
U.S. imports
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Summary:We examine how international trade affects corporate investment through its impact on asset tangibility. We hypothesize that when foreign export reduces a domestic firm’s asset tangibility, the firm’s response of capital investment to internal funds decreases. Using 2SLS regressions, we first document foreign export supply reduces domestic firms’ asset tangibility. Next, using a reduced-form investment regression, we find that as international trade-induced asset tangibility declines, capital investment responds less to cash flow. This study enhances our understanding of the consequences of international trade in the context of corporate finance by highlighting the influence of trade-induced financing frictions on corporate investment.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2020.06.040