Constitutional amendment and stock prices: evidence from China

ABSTRACT

This paper examines the market response to China’s 2018 constitutional amendment, which removes presidential term limits and cements the leadership of the party. We document that stock prices rise as a result of the decrease in political uncertainty. We find that state-owned enterprises (SOEs) gain broadly, especially for centrally controlled SOEs. In particular, the results illustrate that SOEs with high R&D investment earn higher returns, whereas non-SOEs in industries with high growth potential earn relatively lower returns. We also find that stock prices increase more for firms belonging to the Belt and Road key industries and for firms located in provinces that used to be led by Xi Jinping. However, the conventional fixed investment and political connections play no role for either SOEs or non-SOEs. Moreover, the profitability (volatility) of SOEs increases (declines) after this event, when compared with the pre-amendment period. Overall, our study suggests that, as a response to global uncertainty, China’s constitutional amendment improves market certainty.

KEYWORDS:

• Constitutional amendment
• political uncertainty
• stock returns
• state-owned enterprises
• event study

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. h ttps://w ww.reuters.com/article/us-china-parliament/china-allows-xi-to-remain-president-indefinitely-tightening-his-grip-on-power-idUSKCN1GN0

2. h ttps://w ww.theglobaleconomy.com/China/wb_political_stability/

3. h ttps://w ww.nytimes.com/2018/03/11/world/asia/china-xi-constitution-term-limits.html

4. h ttps://n ationalinterest.org/feature/chinas-stability-risk-40,902

5. Source: h ttps://w ww.yidaiyilu.gov.cn/xwzx/roll/16020.htm

6. The results are consistent when using alternative windows, such as the five trading-day returns CAR[−2, 2].

7. All conclusions in the paper remain unchanged for standard errors clustered by firm; or without clustering.

8. We perform Fisher’s permutation test of difference on the coefficient estimates between the two groups (Cleary 1999) (i.e., SOEs, non-SOEs) throughout the paper.

9. h ttps://asia.nikkei.com/Editor-s-Picks/China-up-close/Xi-sends-coded-message-to-closest-aides-through-Zhejiang-trip

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71902187 & 72002221]; Fundamental Research Funds for the Central Universities [2722019PY030].