Hollowing out of the Real Economy: Evidence from China¡¯s Listed Firms

Xu Li, Xiang Shao and Zhigang Tao
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Xu Li: Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China
Xiang Shao: Faculty of Business and Economics, The University of Hong Kong, Hong Kong, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2016, vol. 11, issue 3, 390-409

Abstract: The paper studies an often-observed phenomenon of diversification of manufacturing firms into real estate development in East Asian economies. Utilizing a sudden change in China¡¯s accounting standards that requires firms to disclose information about their real estate holdings for investment purpose (or investment property), we examine both the impact of such diversification on firms¡¯ investment in their original business and the stock market response to such diversification. Our results confirm there exists underinvestment in original business (or hollowing out of the real economy) for firms diversifying into real estate, and that there is a lack of investor response to such diversification, in both short-run and long-run. Our study calls for further research on the role of real estate development in the long-run competitiveness of developing economies.

Keywords: China investment property; hollowing out of real economy; stock market returns (search for similar items in EconPapers)
JEL-codes: E60 G30 R30 (search for similar items in EconPapers)
Date: 2016
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