The Relationship Between the Intensity of Competition in China’s Real Estate Industry and its Return on Equity

Abstract

Does the rate of return from the Chinese real estate industry correlate with the intensity of competition among real estate firms? If China’s equity market performs efficiently, the rates of return of real estate firms should vary indirectly with their level of monopoly power. Greater monopoly power reduces earnings risk and leads to lower costs of capital. The authors analyze empirical evidence and indicate no relationship exists between returns and competition. Speculation may induce stock prices to deviate from normal values. Because normal values assume no speculation, Chinese markets are not likely to be economically efficient.

KEYWORDS:

• abnormal return
• competition
• Chinese equity markets
• efficient markets
• real estate
• HHI Index
• Normalized HHI Index
• Lerner Index

ACKNOWLEDGMENT

The authors wish to thank the anonymous reviewers for comments on earlier versions of this manuscript.