Size Effects of Chinese Real Estate Developers and Their High Leverage and High Turnover Development Model

The past few decades have witnessed Chinese real estate developers’ persistent and successful pursuit of scale expansion as well as continued increase in industrial concentration, both of which strongly suggests the existence of scale economies. Based on data of 160 listed developers in China from 2001 to 2021, this study employs panel data regression analysis using a two-way fixed effects model and an instrumental variable approach. The results show that: 1. Chinese real estate developers exhibit significant size effects, larger companies could generate more revenue per unite of assets, incur lower costs and enjoy higher profitability. The size effects are most significant in developer’s cost reduction performance (economies of scale), particularly in administrative expenses. 2. Developer’s high-leverage operating model could make them grow faster and size expansion could facilitate debt financing in turn. This mechanism of reinforcing loop may lead to overly high leverage and may accumulate credit risks at industrial level. 3. Developer’s high-turnover operating model, however, does not directly contribute to their size expansion and performance improvement