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Industrial policy and asset prices: Evidence from the Made in China 2025 policy

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  • Liu, Xia (Summer)
  • Megginson, William L.
  • Xia, Junjie

Abstract

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.

Suggested Citation

  • Liu, Xia (Summer) & Megginson, William L. & Xia, Junjie, 2022. "Industrial policy and asset prices: Evidence from the Made in China 2025 policy," Journal of Banking & Finance, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:jbfina:v:142:y:2022:i:c:s0378426622001509
    DOI: 10.1016/j.jbankfin.2022.106554
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    More about this item

    Keywords

    China; Industrial policy; Event study; Made in China 2025; Economic policy uncertainty;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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