Industrial Policy and Asset Prices : Stock Market Reactions to Made In China 2025 Policy Announcements

Appendix available here:"https://ssrn.com/abstract=3525571" https://ssrn.com/abstract=3525571.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 2.8%, respectively. However, in the long run, Chinese firms' CARs drop heavily, while U.S. firms' CARs continually increase. Chinese firms do not receive additional state support after the policy assignment, nor do they respond to the policy by expanding investment or employment. In addition, Chinese firms' profitability declines dramatically by on average of 91% after the policy announcement. We conclude that the policy only boosts market reaction in the short run, but does not promote targeted industries longer term