Leverage made at home: Investors' margin loan usage and firm leverage |
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| Institution: | 1. Latin American Reserve Fund, Bogotá, Colombia;2. Department of Finance, Information Systems, and Economics, City University of New York – Lehman College, Bronx, NY, USA;3. (Summer School), Escuela Internacional de Ciencias Económicas y Administrativas, Universidad de La Sabana, Chía, Colombia;4. Faculty of Economics and Business, Universitat Oberta de Catalunya, Barcelona, Spain;5. Faculty of Economics and Business, Universitat de Barcelona, Barcelona, Spain;1. Economist at the International Monetary Fund, Washington, D.C., USA;2. Department of Finance, Insurance and Real Estate, Laboratory for Financial Engineering of Laval University, Faculty of Business Administration, Laval University, Quebec, Canada;3. CEO of the Bourse Régionale des Valeurs Mobilières (BRVM), Abidjan, Côte d''Ivoire;1. School of Business, Anhui University, Hefei, China;2. School of Economics & Management, University of Science and Technology Beijing, Beijing, China.;3. Southampton Business School, University of Southampton, Southampton, United Kingdom.;1. School of Economics and Business Administration, Chongqing University, China;2. Business School, Soochow University, China;1. Universidade Jean Piaget de Guinea-Bissau, Guinea-Bissau;2. Laval University, 1245 Rue de la Colline, L''Ancienne-Lorette, QC G2E 3S1, Canada |
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| Abstract: | The “homemade leverage” conjecture by Modigliani and Miller (1958) implies that firm leverage and investors' leverage are substitutes. Using the data of margin loans by Chinese stock investors, we find that investors take significantly fewer margin loans on a stock when the company announces new bank loans. This effect is entirely driven by investors' margin loan repayment upon announcements, and is stronger for firms with higher institutional ownership or lower leverage. The findings suggest that investors undo the change in firm leverage by adjusting margin loans usage, supporting the “homemade leverage” conjecture. |
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