Exploiting Size Effects Through Financial Leverage: The Case of Chinese Real Estate Developers
Document Type
Research-Article
Journal Name
Journal of Real Estate Research
Keywords
Chinese real estate developer, high leverage, size effects
Abstract
Over the past two decades, Chinese real estate developers have persistently expanded scale, accompanied by steadily rising leverage, especially among larger firms. Using data from 174 listed developers from 2001 to 2021, we document strong size effects: larger firms generate more revenue per unit of assets, incur lower costs, and achieve higher profitability, with the most pronounced gains in administrative efficiency. Financial leverage facilitates this expansion by enabling rapid growth and lowering financing costs, though the reinforcing loop of size and debt also amplifies systemic credit risks. Robustness checks and difference-in-difference analyses around the 2020 “three red lines” policy, supplemented by an alternative measure of financial flexibility, confirm these results. Additional analyses on the effects of housing purchase restrictions policy and air-quality regulations suggest that environmental interventions exert only limited influence on developers’ scale and performance. Overall, the findings align with the Chicago school’s efficiency hypothesis: efficiency advantages drive firm expansion, scale reinforces efficiency, and efficiency gains foster industry concentration. © 2025 American Real Estate Society.