Margin trading program and dynamic adjustment of corporate capital structure: evidence from a quasi-natural experiment in China
【Abstract】Based on the quasi-natural experiment of step-by-step expansion of margin trading program in China, this paper used the DID model to investigate the impact of margin trading program on the dynamic adjustment of corporate capital structure, and also discussed whether there are significant differences in the impact of the implementation of short selling on the adjustment rate of the capital structure when the capital structure is below or above the target level. This paper found that the margin trading program significantly accelerates the adjustment of corporate capital structure, which is driven by the pressure of the short selling mechanism. After the adjustment direction is further distinguished, it is found that when the capital structure is higher than the target level, namely that the capital structure is adjusted downward, the short selling pressure plays a greater role in accelerating the adjustment of the capital structure. Channel tests show that the promoting effect of short selling pressure on the adjustment of capital structure is more significant when the information asymmetry or the agency cost is high. This paper examines the value effect of margin trading program from the perspective of dynamic adjustment of capital structure. At the same time, based on the close relationship between corporate leverage ratio and capital structure, it provides theoretical basis for the role of China’s financial innovation reform in promoting deleveraging of firms from the new perspective of short selling pressure, and provides new evidence for the necessity and importance of China’s financial reform.
【Keywords】 margin trading and short selling; short selling pressure; dynamic adjustment of capital structure; information asymmetry; agency cost;
. ① http://www.sohu.com/a/254433334_115495 [^Back]
. ② The two-step method: estimating Model (2) to obtain the fitted value of Lev*i,t, and then substituting this fitted value into Equation (1) to obtain the adjustment rate λ. However, this method may lead to bias in variable error (Huang, 2010). The reason is that on the one hand, the two-step method causes a large error in the adjustment rate because of the low fitting degree of the target capital structure; on the one hand, this method does not consider the interaction between the determinants and adjustment factors of capital structure. [^Back]
. ③ Compared with Model (3), the use of Model (1) to estimate the dynamic adjustment of capital structure is easier to expand. By adding the interaction term between a variable and the degree of deviation (Levi,t − Levi, t−1), we can test the impact of this variable on the dynamic adjustment of capital structure. [^Back]
. ④ The conditions for the underlying stocks in the Detailed Rules of Shanghai Stock Exchange for Implementation of Margin Trading and Short Selling (Revised in 2015) (the “Domestic Rules”) include that “(1) the underlying shares shall have been listed and traded in the SSE for more than three month; (2) the aggregate float of the issuer the shares of which are bought in margin trading shall not be less than 100 million shares or not less than CNY 500 million in market value; and the aggregate float of the issuer the shares of which are sold in short selling shall not be less than 200 million shares or not less than CNY 800 million in market value; (3) the number of holders of such issuer’s outstanding shares shall not be less than 4000 persons; (4) none of the following has occurred within the last 3 months: (a) the daily average turnover rate is lower than 15% of the daily average turnover rate of the benchmark index, and the daily average transaction value is less than CNY 50 million; (b) the deviation between the daily average range of price increase and decrease and average range of price increase and decrease of the benchmark index exceeds 4%; (c) the fluctuation range reaches above five times the fluctuation range of the benchmark index; (5) the issuer shall have completed the non-tradable share reform; (6) the shares are not under the risk alert board of SSE; (7) the SSE has not otherwise designated the shares as outside the scope of the shares eligible for margin trading and short selling under the Domestic Rules.” The detailed rules on the implementation of margin trading and short selling issued by the Shenzhen Stock Exchange are the same as the basic principles of the Shanghai Stock Exchange, so they are not reported here. Therefore, market size, liquidity, volatility, and trading status are important conditions of underlying stocks. In view of this, this paper controls these factors when selecting PSM factors. [^Back]
. ⑤ For example, on January 25, 2013, the Shenzhen Stock Exchange further expanded the list of underlying stocks for margin trading and short selling: “the expansion of scope of underlying stocks by SZSE is an innovation which references the standards for the selecting index component stocks, rather than relying on previous approach that link the underlying stocks with index component stocks. The list of underlying stocks is sequenced after calculated by weighted evaluation formula, with special consideration given to factors such as large market capitalization, activeness of trading, wider coverage of the boards and stable market performance. The multi-layer frame structure of underlying stocks is basically formed with the stocks on ChiNext Board first included among the underlying stocks for margin trading and securities lending, and the further increment of underlying stocks in SME board.” [^Back]
. ⑥ In order to prevent the risk of excessive market volatility, the Detailed Implementation Rules of the Shenzhen Stock Exchange for Margin Trading and Short Selling have the following restrictions on the scale of margin trading and short selling for individual stocks: (1) when the balance of margin trading of a single underlying stock reaches 25% of the tradable market capitalization of the stock, the exchange can suspend its margin trading on the next trading day; (2) when the balance of short selling of a single underlying stock reaches 25% of the tradable market capitalization of the stock, the exchange can suspend its short selling on the next trading day. [^Back]
. ⑦ http://news.cctv.com/2016/04/13/ARTIBMgeXXgmixstSZAt6y7I160413.shtml [^Back]
(1) Chu, J. & Fang, J. Economic Research Journal (经济研究), (5) (2016).
(2) Chu, J. & Fang, J. Quarterly Journal of Finance (金融学季刊), (3) (2018).
(3) Chu, J., Qin, X. & Fang, J. Management World (管理世界), (1) (2019).
(4) Chen, H. & Liu, F. Accounting Research (会计研究), (9) (2014).
(5) Chen, S. & Ma, H. Management World (管理世界), (7) (2017).
(6) Gu, N. & Zhou, Y. Management World (管理世界), (2) (2017).
(7) Gong, P. & Zhang, Z. Management Review (管理评论), (9) (2014).
(8) Hao, X., Liang, Q. & Li, Z. Economic Research Journal (经济研究), (6) (2018).
(9) Huang, J., Kan, S., Zhu, B. et al. Management World (管理世界), (11) (2016).
(10) Huang, J., Zhu, B. & Xiang, D. Management World (管理世界), (5) (2014).
(11) Huang, H. Economic Science (经济科学), (3) (2010).
(12) Jin, Q., Hou, Q., Li, G. et al. Economic Research Journal (经济研究), (10) (2015).
(13) Jiang, F. & Huang, J. Management World (管理世界), (3) (2011).
(14) Jiang, F., Qu, Y., Lu, Z. Economic Research Journal (经济研究), (4) (2008).
(15) Kuang, X., Chen, Z. & Jin, S. Nankai Economic Studies (南开经济研究), (2) (2017).
(16) Li, K., Xu, L. & Zhu, W. Economic Research Journal (经济研究), (10) (2014).
(17) Li, Z., Chen, C. & Lin, B. Economic Research Journal (经济研究), (4) (2015).
(18) Li, Z., Li, H., Ma, W. Economic Research Journal (经济研究), (11) (2017).
(19) Li, C., Liu, B. & Zhou, P. Journal of Financial Research (金融研究), (9) (2017).
(20) Li, Z., Liang, Q. & Tu, X. Statistical Research (统计研究), (11) (2016).
(21) Lin, H., He, Y., Wang, M. Accounting Research (会计研究), (9) (2016).
(22) Lu, Y., Peng, Z. & Feng, J. Journal of Management Sciences in China (管理科学学报), (11) (2018).
(23) Meng, Q., Hou, D. & Wang, S. Management World (管理世界), (4) (2018).
(24) Quan, X. & Yin, H. Management World (管理世界), (1) (2017).
(25) Sheng, M., Zhang, C. & Wang, Y. Accounting Research (会计研究), (2) (2016).
(26) Sheng, M,, Zhang, M., Ma, L. Management World (管理世界), (3) (2012).
(27) Shen, H., Hua, L. & Xu, J. Management World (管理世界), (11) (2018).
(28) Tian, L. & Wang, K. Economic Review (经济评论), (1) (2019).
(29) Wang, Z., Zhao, D. & Zhu, W. Journal of Financial Research (金融研究), (6) (2007).
(30) Wang, C., Zhang, X. & Bao, H. China Industrial Economics (中国工业经济), (12) (2018).
(31) Wang, G. Economic Perspectives (经济学动态), (7) (2017).
(32) Wang, X., Fan, G. & Yu, J. Marketization Index of China’s Provinces: NERI Report(2016) (中国分省份市场化指数报告(2016)), Social Sciences Academic Press, (2017).
(33) Xiao, H. & Kong, A. Management World (管理世界), (8) (2014).
(34) Zhang, X., Zhou, P. & Li, C. Journal of Financial Research (金融研究), (8) (2016).
(35) Zheng, M., Li, W. & Liu, J. The Journal of World Economy (世界经济), (8) (2018).
(36)Ang, J., Cole R. and J. Lin, 2000, “Agency Costs and Ownership Structure”, Journal of Finance, Vol. 55, pp. 81–106.
(37) Bertrand, M. and S. Mullainathan, 2003, “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences”, Journal of Political Economy, Vol. 111, pp. 1043–1075.
(38) Bris, A., Goetzmann, W. N. and N. Zhu, 2007, “Efficiency and the Bear: Short Sales and Markets Around the World”, Journal of Finance, Vol. 62, pp. 1029–1079.
(39) Byoun, S., 2008, “How and When Do Firms Adjust Their Capital Structures toward Targets?”, Journal of Finance, Vol. 63, pp. 3069–3096.
(40) Chang, E. C., Luo, Y. and J. Ren, 2014, “Short-Selling, Margin-Trading and Price Efficiency: Evidence from the Chinese Market”, Journal of Banking and Finance, Vol. 48, 411–424.
(41) Chang, E., Lin, T. and X. Ma. 2015, “Does Short Selling Discipline Managerial Empire Building?”, Working Paper.
(42) Chen, Q., Chen, X., Schipper, K., Xu, Y. and J. Xue, 2012, “The Sensitivity of Corporate Cash Holdings to Corporate Governance”, Review of Financial Studies, Vol. 25, 3610–3644.
(43) Chen, Z., Dong, G. N. and M. Gu, 2015, “The Causal Effects of Margin Trading and Short Selling on Earnings Management: A Natural Experiment from China”, Working Paper.
(44) Cook, D. O. and T. Tang, 2010, “Macroeconomic Conditions and Capital Structure Adjustment Speed”, Journal of Corporate Finance, Vol. 16. pp. 73–87.
(45) Diamond, D. W. and R. E. Verrecchia, 1987, “Constraints on Short Selling and Asset Price Adjustment to Private Information”, Journal of Financial Economics, Vol. 18, pp. 277–311.
(46) De Angelis, D., Grullon, G. and Michenaud, Sébastien, 2017, “The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment”, Review of Financial Studies, Vol. 30. 262–263.
(47) Drake, M. S., Rees, L. and E. P. Swanson, 2011, “Should Investors Follow the Prophets or the Bears? Evidence on the Use of Public Information by Analysts and Short Sellers”, Accounting Review, Vol. 86. 101–130.
(48) Fang, V. W., Huang, A. H. and J. M. Karpoff, 2016, “Short Selling and Earnings Management: A Controlled Experiment”, Journal of Finance, Vol. 71, pp. 1251–1294.
(49) Fischer, E. O., Heinkel, R. and J. Zechner, 1989, “Dynamic Recapitalization Policies and the Role of Call Premia and Issue Discounts”, Journal of Financial and Quantitative Analysis, Vol. 24, pp. 427–446.
(50) Faulkender, M., Flannery, M. J., Hankins, K. W. and J. M. Smith, 2012, “Cash Flows and Leverage Adjustments”, Journal of Financial Economics, Vol. 103, pp. 632–646.
(51) Gilje, E., 2016, “Do Firms Engage in Risk-Shifting? Empirical Evidence”, Review of Financial Studies, Vol. 29, pp. 2925–2954.
(52) Goel, A. M. and A. V. Thakor, 2008, “Overconfidence, CEO Selection and Corporate Governance”, Journal of Finance, Vol. 63, pp. 2737–2784.
(53) He, J. and X. Tian, 2014, “Short Sellers and Innovation: Evidence from a Quasi-Natural Experiment”, Kelley School of Business Research Paper.
(54) Hutton, A. P., Marcus, A. J. and H. Tehranian, 2009, “Opaque Financial Reports, R2 and Crash Risk”, Journal of Financial Economics, Vol. 94, pp. 67–86.
(55) Jensen, M. C. and W. H. Meckling, 1976, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, Journal of Financial Economics, Vol. 3, pp. 305–360.
(56) Ke, Y., Lo, K., Sheng, J. and J. L. Zhang, 2015, “Does Short Selling Mitigate Optimism in Financial Analyst Forecast? Evidence from a Randomized Experiment”, Working Paper.
(57) Karpoff, J. M. and X. Lou, 2010, “Short Sellers and Financial Misconduct”, Journal of Finance, Vol. 65, pp. 1879–1913.
(58) Lang, M., Lins, K. V. and M. Maffett, 2012, “Transparency, Liquidity and Valuation: International Evidence on When Transparency Matters Most”, Journal of Accounting Research, Vol. 60, pp. 729–774.
(59) Morellec, E., Nikolov, B. and N. Schürhoff, 2012, “Corporate Governance and Capital Structure Dynamics”, Journal of Finance, Vol. 67, pp. 803–848.
(60) Massa, M., Zhang, B. and H. Zhang, 2015, “The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?”, Review of Financial Studies, Vol. 28, pp. 1701–1736.
(61) Serfling, M., 2016, “Firing Costs and Capital Structure Decisions”, Journal of Finance, Vol. 71, pp. 2239–2286.
(62) Tversky, A. and D. Kahneman, 1991, “Loss Aversion in Riskless Choice: A Reference-Dependent Model”, Quarterly Journal of Economics, Vol. 106, pp. 1039–1061.
(63) Xu, N., Jiang, X., Chan, K. C. and Z. Yi, 2013, “Analyst Coverage, Optimism and Stock Price Crash Risk: Evidence from China”, Pacific-Basin Finance Journal, Vol. 25, pp. 217–239.