Credit Provision and Stock Trading: Evidence From the South Sea Bubble
59 Pages Posted: 28 Jun 2019 Last revised: 5 Nov 2020
Date Written: November 3, 2020
This paper studies the mechanism that relates credit provision to asset prices. On one extreme, cheap credit may reduce the cost of capital and increase prices without trading. On the other extreme, naive borrowers may unsuccessfully ride a bubble. We collect every stock transaction for three major British companies during the 1720 South Sea Bubble. We find that loan holders are more likely to buy (sell) following high (low) returns. Loan holders also subscribe to overvalued shares and incur large trading losses. Our results are driven by traders self-selecting into credit facilities and by credit changing the trading behavior.
Keywords: Bubble, Credit Provision, Margin Loans, Investor Behavior
JEL Classification: G01, G12, G21, N23
Suggested Citation: Suggested Citation