The Indirect Effects of Trading Restrictions

46 Pages Posted: 4 Mar 2019 Last revised: 14 May 2020

See all articles by Shujing Wang

Shujing Wang

Tongji University

Hongjun Yan

DePaul University

Ninghua Zhong

Tong Ji University - School of Economics and Management

Yizhou Tang

Tongji University

Date Written: May 13, 2020

Abstract

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

Wang, Shujing and Yan, Hongjun and Zhong, Ninghua and Tang, Yizhou, The Indirect Effects of Trading Restrictions (May 13, 2020). Available at SSRN: https://ssrn.com/abstract=3333403 or http://dx.doi.org/10.2139/ssrn.3333403

Shujing Wang

Tongji University ( email )

Shanghai
China

Hongjun Yan (Contact Author)

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

HOME PAGE: http://sites.google.com/site/hongjunyanhomepage/

Ninghua Zhong

Tong Ji University - School of Economics and Management ( email )

Tongji A Building,
No.1 Zhangwu Road
Shanghai, Shanghai 200092
China

HOME PAGE: http://sem.tongji.edu.cn/semen_data/attachments/month_1507/2015720112620.pdf

Yizhou Tang

Tongji University ( email )

Shanghai
China

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