Trade liberalization, comparative advantage, and scale economies stock market evidence from Canada

Abstract

The Canada-United States Free Trade Agreement (FTA) provides an excellent opportunity to analyze the impact of a comprehensive trade liberalization. In this paper, a stock market event study is employed to capture investors' expectations about the consequences of this agreement for manufacturing firms in Canada. The primary question addressed is whether abnormal stock market returns corresponding to news about the FTA are consistent with hypotheses based on comparative advantage and economies of scale. The results indicate that both comparative advantage and scale economies played a role in determining investors' perceptions of the impact of the FTA. © 1994.