Trade Policy Uncertainty, Innovation Performance and Stock Price Crash Risk: Evidence From the Backbone of Corporate China

Abstract

This study focuses on the exposure of leading Chinese firms to stock price crash risk amid the heightened policy uncertainty and geopolitical hostility of the US–China trade war. We find that Chinese multinationals with ex ante outward investments in the United States through cross‐border M&A or green field projects exhibit lower stock price crash risk since the onset of the trade war. This finding remains robust to a battery of additional checks, including multifaceted parallel trends tests, entropy balancing, placebo tests and alternative measures. In addition, cross‐sectional heterogeneity analyses unveil that high‐tech companies are the primary driver of the main finding. Moreover, mechanism analyses highlight that Chinese high‐tech firms with established outward investments in the United States demonstrate stronger innovation performance and more resilient innovation pathway under tightening restrictions of technology transfer and collaboration since the outbreak of the trade war. Our empirical evidence suggests that established ties through ex ante outward foreign direct investments sustain valuable strategic and technological externalities, effectively alleviating the exposure to left‐tail risks driven by trade and geo‐economic policy turmoil.