Valuation Effects of US–China Trade Conflict: The Role of Institutional Investors

Abstract

Employing an event study approach to the US–China trade conflict, we found that this conflict had an overall negative effect on the stock market performance of Chinese listed firms, but firms with institutional investor holdings (IIH) exhibited smaller losses than their counterparts in response to a US presidential memo announcing a trade conflict. We also examined the heterogeneous effects of this conflict on firms. The positive effect of IIH was larger for firms with foreign exposure and firms located in provinces with a higher degree of marketization. Institutional investor holdings helped to reduce firms' cost of refinancing and improved their long-run performance given the same short-term loss in response to the US presidential announcement during the trade conflict. These findings explain the role of institutional investors in alleviating the effects of the US–China trade conflict and achieving financial stability from a micro-perspective. The results have policy implications for corporate governance and financial market stabilization in response to trade policy uncertainty.