The Effects of De-Capacity Policy on Steel and Coal Firms’ Profitability: Evidence from China’s Listed Companies

Abstract

Chinese overcapacity in the steel and coal industry has been on the rise since 2013, which leads to the misallocation of resources and decreases in production efficiency. In 2015, the Chinese central government adopted a series of de-capacity policies to resolve excess capacity and improve corporate profitability. However, there is scant evidence on the impacts of de-capacity policies on the firm profitability. Based on the data from Chinese listed companies in the steel and coal industry, this study constructs the difference-in-difference (DID) method to investigate the effects of the de-capacity policy on the profitability of listed companies in the steel and coal industry empirically. The results show that the de-capacity policy significantly increases the return on equity (ROE) of the experimental group, which is higher than that of the control group by 12.4%. That is partially because of the improvement in gross profit margin, management efficiency, and return on man-power due to the de-capacity policy. This study offers new evidence on the efficiency of China’s de-capacity policy toward the steel and coal industries through data at the enterprise level.