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US business exposed to Brexit doubt

5 July 2017

The article at a glance

Uncertainty ‘exported’ to America due to Brexit could spark rise in US unemployment, according to research co-authored by Pembroke Visiting Scholar at …

Uncertainty ‘exported’ to America due to Brexit could spark rise in US unemployment, according to research co-authored by Pembroke Visiting Scholar at Cambridge Judge Business School.

US business exposed to Brexit doubt

Uncertainty “exported” to the United States due to Britain’s pending exit from the European Union could cause a temporary rise in US unemployment as UK-exposed American firms disproportionately cut investments, according to research by the Pembroke Visiting Scholar at Cambridge Judge Business School.

The US unemployment rate stood at 4.5 per cent when the research was completed, so a four to five per cent increase from that figure would take that rate to around 4.7 per cent. The research says that this Brexit-related jobless increase would disappear in about two years.

The research, co-authored by Murillo Campello, Professor of Finance at Samuel Curtis Johnson Graduate School of Management at Cornell University, tracks the behaviour of UK-exposed American firms around key dates related to Brexit – including the February 2016 setting of the date of the Brexit referendum, the June 2016 referendum, and the March 2017 triggering of UK withdrawal from the EU.

Professor Campello has been a Pembroke Visiting Scholar at Cambridge Judge this year, working closely with the business school’s Finance & Accounting subject group, one of seven subject groups at Cambridge Judge.

Professor Campello and two colleagues, Gustavo Cortes and Fabricio d’Almeida of the University of Illinois, found in their research that UK-exposed American firms disproportionately (compared to control firms) reduced certain activities – firing more workers, saving more cash, and cutting more investments on both fixed capital and research and development.

The research is the “first to provide a firm-level analysis of the international transmission of an unprecedented, global political uncertainty shock”, according to recent presentations by Professor Campello of the research entitled “Exporting Uncertainty: Real Effects of Brexit on Corporate America”.

Although trade between the UK and US accounts for a very small proportion of US economic activity, the research says uncertainty surrounding Brexit could spark a “domino effect” on the global economy that hurts the US economy. The UK is the fifth top export and seventh top import partner of the US, while US banks hold four per cent of US GDP in claims with UK banks.

Uncertainties relating to Brexit include labour market uncertainty, trade uncertainty pending the outcome of negotiations, and capital market uncertainty, the presentation says.

Pembroke Visiting Scholars have been welcomed at Cambridge Judge since 2012 to allow senior faculty active in finance to visit the business school for periods up to six months. Holders of the post are admitted to Pembroke College, one of the colleges of the University of Cambridge, where they join in meals and other events at the college, and have use of an apartment rent-free for the period of their residence.

Bart Lambrecht, Professor of Finance at Cambridge Judge and Director of the Cambridge Endowment for Research in Finance, said the Pembroke Visiting Scholars scheme has “added dynamism and another international dimension to the Finance & Accounting group, its research and teaching activities”.