What is happening is that the reference is passed by value, i.e., a copy of the reference is passed. Nothing in java is passed by reference, and since a string is immutable, that assignment creates a new string object that the copy of the reference now points to. The original reference still points to the empty string.
This would be the same for any object, i.e., setting it to a new value in a method. The example below just makes what is going on more obvious, but concatenating a string is really the same thing.
void foo( object o )
{
o = new Object( ); // original reference still points to old value on the heap
}