State Ownership and Monetary Supply Shocks: A Tale of Two Sectors

78 Pages Posted: 23 Nov 2021 Last revised: 1 Jul 2022

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: June 29, 2022

Abstract

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

Belo, Frederico and Hao, Dapeng and Lin, Xiaoji and Qiu, Zhigang and Tong, Jincheng, State Ownership and Monetary Supply Shocks: A Tale of Two Sectors (June 29, 2022). 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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