Effects of the Canada-United States Free Trade Agreement on the Eqity Value of U.S. and Canadian Banks

Bierman, Leonard, Fraser, Donald R., Adkisson, Amanda | January 1, 1989

This Article explains the effects of the Canada-United States Free Trade Agreement on the wealth position of shareholders of major U.S. and Canadian banks. Following the argument that stock prices in an efficient market should capture the effects of changes in regulation (both domestic and international), one would expect the prices of Canadian banks to decrease as they face substantial new competition. Likewise, the stock prices of U.S. banks operating in Canada should either rise or remain unchanged as a result of the FTA. If the greater power associated with Canadian operations is expected to add to risk-adjusted profits, stock prices of these U.S. banks should increase. To the extent that these potential profits are expected to be competed away in the Canadian markets, or are seen to be of a relatively insignificant nature, the prices of U.S. banks will not change.