| Abstract | In recent years, Chinese economic downward pressure is huge and the supply-side structural reform is going deeper and deeper. Under this circumstance, the industrial firms’ extremely high leverage and the risk it brings are arousing the attention of the whole society. How to reduce the leverage of Chinese firms is an important and urgent problem. Although there is plenty of literature studying firms’ capital structure, there is little research linking the leverage of financial market (financial leverage) and the leverage of industrial firms (corporate leverage). In our paper, we try to investigate the relation between financial leverage and corporate leverage by studying the impact of the margin trading and security lending pilot program on firms’ leverage.
In 2010, Chinese security market launched the margin trading and security lending pilot program. This program allows investors in the security market to borrow money or pilot stocks from security companies. Using the money borrowed from the security company, investors can buy pilot stocks, this kind of trade is called “margin trading”. Using the pilot stocks borrowed, investors can sell them in the market, this kind of trade is called “short selling”. The launch of the program raises investors’ leverage, thus increases the leverage of financial market (financial leverage). The program also brings short selling into Chinese security market for the first time. Using the launch of the program as a quasi-experiment and 1226 public firms in Chinese A-share stock market as our sample, we conduct difference-in-differences estimation to investigate the relation between the pilot program and firms’ leverage. We find that after a firm’ stocks become pilot stocks, the long-term debt ratio of the firm will decrease significantly, however, the short-term debt ratio won’t have significant change. Further analysis indicates that after a firms’ stocks become pilot stocks, the firm would reduce investment and its demand of debt financing, thus leads to a decrease in long-term debt ratio. Through heterogeneity analyses, we also find that the impact of the program on long-term debt ratio is more pronounced in firms which are state-owned, in monopolizing industries, less concerned by the market or in short of cash. In addition, we use fuzzy RD and propensity matched sample to address the concern of selection bias, we also conduct pre-trend analysis to address the concern of compounding effect, the main results still hold.
Our results indicate that the launch of the margin trading and security lending pilot program makes investors more sensitive to the firms’ negative news and less tolerant to bad investment decisions. The firms’ managers can expect this and thus they would be more conservative when making investment decisions. So being pilot stocks leads to a lower investment level and less need of debt financing, and then results in a decrease of the firm’s long-term debt ratio. Our findings also suggest that listed firms’ capital structure is affected by the leverage of investors in stock market. Financial leverage changes the investors’ risk and thus changes their behaviors, the investors’ behaviors can influence firms’ decision through stock market, and then change firms’ leverage. The increase of financial leverage leads to a decrease of corporate leverage.
This paper has three academic contributions. First, this paper studies the impacts of the margin trading and security lending pilot program from capital structure perspective, and contributes to the literature about the program’s impacts on firms’ behaviors. Second, we find that leverage of investors in the security market can affect the leverage of firms, this paper also contributes to the literature about the determinants of Chinese firms’ capital structure. Third, we use fuzzy RD and PSM to address the selection bias issue which is rarely considered by previous studies.
This paper also has implications for policy making. Our findings can help related administrations to understand the relation between financial leverage and corporate leverage, and provide theoretical guidance for the ongoing task which is aimed at lowering firms’ leverage. In some degree, our results also suggest that investors in capital market can discipline firms’ managers. Therefore, via affecting investors’ behaviors, developing capital market and improving the efficiency of capital market can be powerful methods to discipline listed firms and lower their leverage.
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