Industrial policy and downside risk: Evidence from CHIPS-Exposed firms

This paper investigates the relationship between risk and stock returns for CHIPS-exposed semiconductor firms and non-CHIPS-exposed firms across two periods- before and after implementing the CHIPS Act. In doing so, we focus on the relationship between stock returns and downside risk using a panel regression framework estimated via the generalized method of moments (GMM) with heteroskedasticity and autocorrelation consistent standard errors. Our results show that market risk increased after the Act was implemented, while the relative downside risk premium decreased. Furthermore, the CHIPS-exposed semiconductor firm stocks had higher market risk premium than the non-CHIPS-exposed stocks across the two periods. Despite this increase in market risk premium, the relative downside risk premium was statistically insignificant after implementing the CHIPS Act. The findings of this study have several policy implications for financial practitioners, investors, and researchers. For instance, financial practitioners may have to reassess their risk models and hedging strategies to account for heightened volatility yet reduced relative downside risk in semiconductor and chip manufacturing sectors. Furthermore, policymakers and financial regulators should be aware that large-scale industrial policies such as the CHIPS Act can shift systematic and idiosyncratic risks, potentially requiring additional oversight or macroprudential measures.