The effect of foreign competition on firm risk-taking: Evidence from tariff reduction

Drawing on threat rigidity theory, this study hypothesizes that foreign competition driven by tariff reduction may negatively impact domestic firms’ risk-taking. Despite the inherent threats posed by intense foreign competition, domestic firms’ responses may vary. Thus, this study also hypothesizes that performance relative to aspiration and strategic conformity may mitigate the negative impact of foreign competition on domestic firms’ risk-taking. To test these hypotheses, this study examines sharp decreases in import tariff rates within U.S. manufacturing industries as a quasi-natural experiment, employing the difference-in-differences approach. The results strongly support the hypotheses, suggesting that while foreign competition indeed reduces domestic firms’ risk-taking, this effect is mitigated by performance relative to aspiration and strategic conformity.