The Indirect Effects of Trading Restrictions
46 Pages Posted: 4 Mar 2019 Last revised: 14 May 2020
Date Written: May 13, 2020
Stock market trading restrictions affect stock prices and liquidity directly through constraints on investors’ transactions and indirectly by altering the information environment. We isolate this indirect effect by analyzing how stock market restrictions affect corporate-bond prices. Exploiting the staggered relaxations of trading restrictions in the Chinese stock market as a quasi-natural experiment, we document that the easing of trading restrictions on a firm’s stock decreases the credit spread of its corporate bond. This effect is stronger for firms with less transparency or lower credit ratings. Our evidence suggests that the effect is likely due to improved stock price informativeness.
Keywords: Corporate bond spread; Margin trading; Short selling; Information asymmetry; Quasi-natural experiment; Chinese financial markets
JEL Classification: G12, G15, G18
Suggested Citation: Suggested Citation