A Tale of Two Sectors: Implications of State Ownership Structure on Corporate Policies and Asset Prices in China

55 Pages Posted: 23 Nov 2021

See all articles by Frederico Belo

Frederico Belo

INSEAD; Centre for Economic Policy Research (CEPR)

Dapeng Hao

Tsinghua University - School of Social Sciences

Xiaoji Lin

University of Minnesota

Zhigang Qiu

School of Finance, Renmin University of China

Jincheng Tong

University of Toronto

Date Written: November 18, 2021

Abstract

We investigate the impact of state ownership structure on asset prices and corporate policies. By primarily focusing on China's corporations, we show that the relationship between expected returns and capital investment varies significantly across state owned enterprises (SOE) and private owned enterprises (POE). A portfolio that longs low investment and shorts high investment firms earns an average annual excess stock return of 5% in the SOE sector. In contrast, there is no relationship between investment and expected returns in the POE sector. We show that the difference in the link between expected returns and investment across SOE and POE firms is driven by their differential exposures to the debt issuance shocks, which captures the monetary supply shocks in China. As SOE firms have easier access to bank loans, the high investment firms in the SOE sector are more able to raise debt despite that debt supply is shrinking, and hence they are less risky. We develop a dynamic model with SOE and POE firms facing different frictions in debt markets. The economic mechanism emphasizes that heterogeneous access to the debt market is an important determinant of equilibrium risk premiums across sectors with different state ownership.

Keywords: State ownership, return predictability, POE, SOE, debt issuance cost shock, risk premiums

JEL Classification: D53, E22, G12, G32

Suggested Citation

Belo, Frederico and Hao, Dapeng and Lin, Xiaoji and Qiu, Zhigang and Tong, Jincheng, A Tale of Two Sectors: Implications of State Ownership Structure on Corporate Policies and Asset Prices in China (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3966723 or http://dx.doi.org/10.2139/ssrn.3966723

Frederico Belo

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dapeng Hao

Tsinghua University - School of Social Sciences ( email )

Beijing, 100084
China

Xiaoji Lin (Contact Author)

University of Minnesota ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

Zhigang Qiu

School of Finance, Renmin University of China ( email )

Room 308
Mingde Main Building, Renmin University of China
Beijing, Beijing 100872
China

Jincheng Tong

University of Toronto ( email )

Toronto, Ontario M5S1L1
Canada

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