Margin-trading volatility and stock price crash risk

Lv, Dayong; Wu, Wen Jian

doi:10.1016/j.pacfin.2019.06.005

Cited by 16 publications

(4 citation statements)

References 54 publications

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“…Our work complements the existing literature relating margin trading to market crashes due to margin calls and fire sales (Brunnermeier, 2009; Edwards, 1999; Galbraith, 1954; Jiang, 2019; Khandani & Lo, 2011; Lv & Ruan, 2018; Lv & Wu, 2019; White, 1990). Bian et al.…”

Section: Introductionmentioning

confidence: 67%

“…For example, Chang et al (2014) and Chen et al (2016) find that margin trading improves market efficiency, while other researchers find inconclusive evidence on whether margin trading improves liquidity or reduces volatility. 6 Our work complements the existing literature relating margin trading to market crashes due to margin calls and fire sales (Brunnermeier, 2009;Edwards, 1999;Galbraith, 1954;Jiang, 2019;Khandani & Lo, 2011;Lv & Ruan, 2018;Lv & Wu, 2019;White, 1990). Bian et al (2021) find that margin traders in regulated brokerage firms in China are subject to the disposition effect and that leverage constraints induced forced and pre-emptive sales during the 2015 market 4 Daily margin interest is available for the Indian and Taiwanese markets (Andrade et al, 2008;Kahraman and Tookes, 2017), and weekly margin interest is available for the Japanese market (Hirose et al, 2009).…”

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confidence: 64%

“…Margin traders lose substantial amounts of money in the Chinese rebar futures market (Ladley et al., 2020). Margin trading volatility increases the risk of a stock price crash in the Chinese stock market (Lv & Wu, 2019). Investors lose more when the margin constraint is relaxed in the U.S. retail foreign exchange market (Heimer & Simsek, 2019).…”

Section: Literature Review and Development Of Hypothesesmentioning

confidence: 99%

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The potential built‐in supply effect from margin trading in the Chinese stock market

Choy

Wang

2022

The Financial Review

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Utilizing a unique daily data set, we examine how the covering of margin positions affects earnings announcement returns in the Chinese stock market dominated by retail traders. Unlike previous research on forced covering during price crashes, we propose that margin interest acts as a builtin supply and find that intensive covering of margin positions pushes down stock prices during earnings announcements of extreme good news. The release of built-in supply leads to stronger post-earnings-announcement drift (PEAD) after good news compared with that after bad news, consistent with investors' tendency to realize profits after a gain under the disposition effect.

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Section: Introductionmentioning

confidence: 67%

mentioning

confidence: 64%

Section: Literature Review and Development Of Hypothesesmentioning

confidence: 99%

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The potential built‐in supply effect from margin trading in the Chinese stock market

Choy

Wang

2022

The Financial Review

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“…7. Factors other than opacity have also been linked to crash risk in the China setting, including investor protection (Zhang et al, 2017); share pledging (Li et al, 2019); executive compensation (Xu, CAFR 24,2 Li, Yuan, & Chan, 2014;Bai, Wang, Yu, & Zhang, 2019;Sun, Habib, & Huang, 2019); margin trading (Lv & Wu, 2019); analyst coverage (Xu, Jiang, Chanmand, & Yi, 2013).…”

Section: Notesmentioning

confidence: 99%

Real earnings management, corporate governance and stock price crash risk: evidence from China

Kannan

Rau

et al. 2022

CAFR

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PurposeThe aim of this paper is to provide additional insights on the association between real earnings management (REM) and crash risk, particularly from the perspective of an emerging market economy. It also examines the moderation role that internal and external corporate governance may play in this area.Design/methodology/approachRelying on archival data from the RESSET and CSMAR databases over a timeframe from 2010 to 2018 of China listed company, the authors test the hypotheses by regressing common measures of crash risk on the treatment variable (REM) and crash risk control variables identified in the prior crash risk literature. The authors also introduce monitoring proxies (internal controls as an internal governance and institutional ownership as an external governance) and assess how effective internal and external governance moderate the relation between REM and stock price crash risk.FindingsThe results suggest firms with higher REM have a significantly greater stock price crash risk, and that this association is mitigated by external monitoring. That is, greater institutional ownership, particularly pressure insensitive owners, mitigates the impact of REM on stock price crash risk. However, internal control does not mitigate the association between REM and stock price crash risk.Originality/valueFollowing the passage of the Sarbanes–Oxley (SOX) Act, prior research has documented an increase in the use of REM and a positive association between REM and cash risk. The authors demonstrate that they persist in one of the largest emerging markets where institutional regulations, market conditions and corporate behaviors are different from those in developed markets. Also, the assessment of the moderation effect of internal and external governance mechanisms could have meaningful implications for investors and regulators in Chinese and other emerging markets.

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