State Ownership and Monetary Supply Shocks: A Tale of Two Sectors
78 Pages Posted: 23 Nov 2021 Last revised: 1 Jul 2022
Date Written: June 29, 2022
We investigate the impact of monetary supply shocks and state ownership on asset prices, corporate policies and capital allocation. By primarily focusing on corporations of China, we show that the relationship between expected returns and capital investment varies significantly across state owned enterprises (SOE) and private owned enterprises (POE). The investment return spread - the average returns of a long low investment and short high investment firms - is about 5% per annum in the SOE sector, but close to zero in the POE sector. We show that the difference in the relationship between expected returns and investment across SOE and POE firms is driven by their differential exposures to the monetary supply shocks in China. Because SOE firms have easier access to bank loans, the high investment firms in the SOE sector can still raise debt to finance their investments when debt supply shrinks, and hence they are less risky. We develop a dynamic model with monetary supply shocks and 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 and capital misallocation 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: Suggested Citation