Housing Developers’ Heterogeneous Decision-Making under Negative Shock after the High-Growth Era: Evidence from the Chinese Real Estate Economy

Abstract

This research uses difference-in-difference (DID) and other empirical methods to analyze firm-level real estate data to discover how heterogeneous firm characteristics affect managers’ decision-making about development expansion when a firm faces a temporary negative sales shock in the Chinese housing market. The manager’s decision is a utility maximization problem under uncertainty, determined by their risk aversion levels, which managers choose to optimize by considering other factors of interest, including career risk and personal wealth. Also, the advance payment rule encourages real estate developers to maintain high turnover, since new projects allow developers to collect cash first. The results show that state-owned enterprises (SOEs) are much more conservative than other types of developers. SOEs tend to focus on current developing projects. Firms with more concentrated management pursue expansion and seek to use new project sales to compensate for their slower growth. Larger developers with headquarters in large cities tend to slow their development speed when they observe negative signals, as they can quickly engage in new projects given these firms’ easy access to financial resources such as bank loans. This study makes a novel contribution to the literature since previous research has tended to focus on the macro market level rather than the firm level. The findings also have strong policy and regulation value. The results indicate that higher cashflow monitoring needs, especially to monitor family-owned developers, to prevent misuse and excessive project expansion.

Keywords

• uncertainty
• negative shock
• decision-making
• utility maximization
• risk-aversion
• real estate development