Can Targeted Sanctions Generate Deterrence Effects through Signaling? Evidence from Sanctions Deployed by Mainland China against Taiwan

We investigate the deterrence effects of a firm-targeted sanction and a politician-targeted sanction deployed by Mainland China against Taiwan to deter support for “Taiwan Independence”. In the short-run, we find that the signal sent by the targeted sanctions generated deterrence to firms that are not the direct target of the sanctions. Specifically, firms with political inclination toward “Taiwan Independence”, measured by donations to the party that supports “Taiwan Independence”, while being invested in Mainland China before the sanction experienced a decrease in stock return. The short-run effect is mainly driven by the change in political sentiment that influences the expectation of individual investors. In the medium to long-run, we find no evidence that firms affected by the deterrence of the sanction reduced their investment in Mainland China as a behavior response