Contestability of the urban land market: an event study of Hong Kong land auctions

The traditional theory of urban land markets assumes perfect contestability—the absolute freedom of market entry—that compels developers to bid up the land rent to equal the economic profit from land use. This assumption, however, is empirically untested due to the difficulties in measuring the ex ante economic profit of land acquisition. We overcome these difficulties by applying the event-study methodology to Hong Kong government land auctions. When a developer acquires a site at a price below its fair market value, the rationality of the stock market entails a positive abnormal return on the developer’s stock. Our analysis shows evidence of positive expected abnormal returns, indicating an imperfectly contestable land market. We further show that the expected abnormal return increases with the site value and the government land disposal level but decreases with the property market liquidity.