Abstract: Do targeted sanctions hurt American firms financially? Existing research offers competing
arguments but little firm-level evidence on financial fundamentals. We shift the debate from
aggregate sender costs to response-conditional performance. Our real options theory shows
that partial, evolving sanctions present firms with binary choices depending on their starting
position. Prior suppliers stay or exit; prior non-suppliers enter or stay out. Firms select among these options based on their resources and each option’s expected value, so response-group performance reflects selection into each path. We test the theory using U.S. Entity List restrictions on Huawei. We examine 545 supplier and peer firms during 2015–2023 with probit and doubly robust difference-in-differences models. Outside options predict exit; financial flexibility predicts entry. Entrants achieve a persistent ROA advantage of 4–5 percentage points. Exiters and stayers show no statistically significant peer-relative underperformance. Treating exposed firms as a single group, therefore, obscures response-conditional financial outcomes of targeted sanctions.
Moderator: Rachel Wellhausen