The effect of government 5G policies on telecommunication operators’ firm value: Evidence from China

Highlights

• Telecommunication policies exert significant influence on telecommunication operators.

• Impact of the Chinese government's 5G development policy announcements on firm value is analyzed.

• Policy announcements negatively affect telecommunication operators' stock returns.

• More restrictive policies lead to a more pronounced decline in firm value.

Abstract

To lead the world's fifth-generation mobile communication networks (5G) market, China introduced several policies to support 5G industry development that will impact telecommunication operators, the main implementers in this industry. Thus, this study examines the impact of the government's 5G policy announcements on telecommunication operators' firm value in China, where the state exerts a strong influence on industry development. We find that government policy announcement in general affects telecommunication operators' stock returns negatively, and when the government announces policies with a higher level of interference, the decline in firm value is more pronounced. To understand the comprehensive impact of 5G technology on telecommunication operators, we also examine the effect of institution-driven corporate technology R&D and investment activities on firm value. We find that the firms' 5G activities also decrease their firm value, and this effect is more significant than government policy announcements. These results imply that the market has a negative evaluation of the introduction of 5G technology due to its immaturity and uncertainty. This study provides a basis for understanding the market's views on 5G technology and development policies.

Introduction

5G is a new generation of mobile communication technology. Although it is still in the early stage of development, it has huge market potential. 5G is not only expected to provide faster speeds than 4G, but also its low latency and ultra-reliable capabilities will enable a wide range of new services such as smart factories and autonomous driving (5GPPP, 2015; Andrews, Buzzi et al., 2014). However, the major media reports that it is still in the early stage of technological development and its development is far from the level required for large scale commercialization. For example, the Economist believes that there are still many uncertainties in its technological development and the changes it will bring,¹ and the WSJ predicts that it is still a few years away from true applicability.²

At the national level, the emergence of 5G means new economic development opportunities. Cave (2018) argues that the countries that lead a new generation of mobile communication technology will dominate business opportunities in the industry value chain through the first-mover advantage. However, the construction of 5G networks also poses greater challenges than that of previous technologies. For example, to achieve the same network coverage, 5G requires a denser base station construction than 4G, which requires more expenditure (Grijpink & Ménard, 2018; Oughton & Frias, 2018). Therefore, the governments of many countries announced their own 5G development policies to develop the 5G industry. Research on next-generation mobile communication development policies in the European Union, Britain, China, and other countries is increasing (Lemstra, 2018; Oughton & Frias, 2018).

This study examines the impact of the Chinese government's 5G development policy announcements on telecommunication operators' firm value, as well as the impact of these operators' 5G R&D and investment activities in the context of China's implementation of many related policies. In the government's 5G policy implementation, telecommunication operators are the key implementers as well as affected market players (Bauer & Bohlin, 2019). They are not only the main developers of communication technology, but they also lay the foundation for building the entire industrial ecosystem through network construction and service development activities (Liu & Shi, 2017; Xia, 2017). Thus, the implementation of a new generation communication technology policy has multiple effects on telecommunication operators. For example, new investment opportunities may also mean new costs (Bauer, 2010). Therefore, to develop a new generation of communication technology, it is particularly important for the government to fully consider the impact on telecommunication operators when designing related development policies.

Although the government's new generation mobile communications development policy has an important impact on telecommunication operators, previous studies either focused on the effects of 5G policies on technological development (Frias & Martínez, 2018; Kantola, Llorente Santos, & Beijar, 2016) or reviewed the histories of past mobile communication technologies to predict the future 5G policies of various countries (Lemstra, 2018; Xia, 2017). There is little research on anticipating the effect of the stock market's reaction following the implementation of these policies on telecommunication operators. Furthermore, with respect to corporate activities, existing research concentrates on either the calculation of 5G technology investment costs (Oughton & Frias, 2018) or telecommunication operators' 5G business model innovation strategies (Rao & Prasad, 2016). Not much attention has been paid to the stock market's reaction to companies' R&D and investment activities for new generation communication technology.

To fill these research gaps, we investigate the following question: What is the stock market's reaction to 5G policy announcements and a firm's 5G-related activities? To address this research question, we base our study on the actor network theory and the signaling theory. We propose that the government's announcements of 5G development policy and the operators' 5G activities influence the short-term market value of Chinese telecommunication operators. In this framework, the actor network theory underpins the impact of policy announcement on companies (Yoo, Lyytinen, & Yang, 2005) and the signaling theory underpins the stock market reaction to the policy announcements as well as the operators' 5G activity announcements (Spence, 2002).

The development of the Chinese telecommunications industry is mainly a result of the government's efforts to catch up on technology (Yu, Zhang, & Gao, 2012). In the context of the trade dispute with the United States, which is expanding into technological competition, China will pay more attention to the international competitiveness of its domestic communication technology. After the exploration period of international market leadership in 3G and 4G (Vialle, Song, & Zhang, 2012), it is expected that in the competition of international 5G technology, the Chinese government will exert stronger leadership in market development (Xia, 2017). Therefore, China is an appropriate choice to study the market reaction to announcements of 5G development policies and telecommunication operators' related business activities.

This study is timely and offer three main contributions to the literature on new generation telecommunication technology research. First, this is the first study on the stock market reaction to telecommunication operators following the announcement of government policy. Second, we examine the differences in the impact of the specific content of government policies on firm value by studying the differing impact of central and local policies on telecommunications operators. Finally, we also consider the impact of operators' corresponding activities on their firm value given the implementation of many government policies. These findings will enrich our understanding of the impact of public policy and firms’ 5G business activities on firm value creation, as well as of the differences among the impact of different policies.

The paper is structured as follows. In Section 2, previous literature is reviewed and hypotheses established accordingly. In Section 3, the methodology and data are introduced. In Section 4, the test results are analyzed and followed by a discussion. Finally, Section 5 concludes the paper.