Industrial Policy and Asset Prices: Evidence from the Made in China 2025 Policy

54 Pages Posted: 30 Jan 2020 Last revised: 28 Jul 2022

See all articles by Xia (Summer) Liu

Xia (Summer) Liu

University of Richmond

William L. Megginson

University of Oklahoma

Junjie Xia

Central University of Finance and Economics; Peking University

Date Written: March 28, 2022

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 1.4%, respectively. However, in the long run, Chinese firms’ CARs drop heavily, while U.S. firms’ CARs continually increase. We further find that after the policy announcement, Chinese firms’ profitability declines dramatically by an average of 52.9% and firms’ leverage increase significantly, but they do not receive additional government subsidies. 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: Evidence from the Made in China 2025 Policy (March 28, 2022). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3521006 or http://dx.doi.org/10.2139/ssrn.3521006

Xia Liu

University of Richmond ( email )

102 UR Drive
Richmond, VA 23173
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

Central University of Finance and Economics ( email )

Beijing
China

Peking University ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

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