Industrial Policy and Asset Prices: Stock Market Reactions to Made In China 2025 Policy Announcements

49 Pages Posted: 30 Jan 2020 Last revised: 18 Aug 2020

See all articles by Xia (Summer) Liu

Xia (Summer) Liu

University of Oklahoma

William L. Megginson

University of Oklahoma

Junjie Xia

Peking University - Institute of New Structural Economics (INSE)

Date Written: August 17, 2020

Abstract

Appendix available here:https://ssrn.com/abstract=3525571.

We study the link between industrial policy and asset prices by using the Made in China 2025 industrial policy, announced in May 2015, as an external shock. We track Chinese firms and U.S. firms in ten high-tech industries targeted by the policy. In the short run, stock prices, measured by cumulative abnormal returns (CARs), increase significantly for both Chinese and U.S. firms, by 9.9% and 2.8%, respectively. However, in the long run, Chinese firms’ CARs drop heavily, while U.S. firms’ CARs continually increase. Chinese firms do not receive additional state support after the policy assignment, nor do they respond to the policy by expanding investment or employment. In addition, Chinese firms’ profitability declines dramatically by on average of 91% after the policy announcement. We conclude that the policy only boosts market reaction in the short run, but does not promote targeted industries longer term.

Keywords: China, Industrial Policy, Event Study, R&D Expenditures, Economic Policy Uncertainty

JEL Classification: G14, G15, G18, K11, L52, L60

Suggested Citation

Liu, Xia and Megginson, William L. and Xia, Junjie, Industrial Policy and Asset Prices: Stock Market Reactions to Made In China 2025 Policy Announcements (August 17, 2020). Available at SSRN: https://ssrn.com/abstract=3521006 or http://dx.doi.org/10.2139/ssrn.3521006

Xia Liu

University of Oklahoma ( email )

United States

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

Junjie Xia

Peking University - Institute of New Structural Economics (INSE) ( email )

Beijing, 100871
China

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