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Margin trading program and dynamic adjustment of corporate capital structure: evidence from a quasi-natural experiment in China

HUANG Junwei1 GONG Guangming1

(1.Business School of Hunan University)

【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;

【DOI】

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    [1]. ① http://www.sohu.com/a/254433334_115495 [^Back]

    [2]. 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]. 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,tLevi, t−1), we can test the impact of this variable on the dynamic adjustment of capital structure. [^Back]

    [4]. 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]. 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]. 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]. ⑦ http://news.cctv.com/2016/04/13/ARTIBMgeXXgmixstSZAt6y7I160413.shtml [^Back]

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This Article

ISSN:1002-5502

CN: 11-1235/F

Vol 35, No. 10, Pages 64-81

October 2019

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Article Outline

Abstract

  • 1 Introduction
  • 2 Literature review, theoretical analysis and hypotheses
  • 3 Research design and sample selection
  • 4 Empirical results and analysis
  • 5 Conclusion and implication
  • Footnote

    References