Leverage Made at Home: Investors' Margin Loan Usage and Firm Leverage

40 Pages Posted: 14 Jan 2022

See all articles by Chunbo Liu

Chunbo Liu

Institute of Financial Studies, Southwestern University of Finance and Economics

Zilong Niu

Southwestern University of Finance and Economics (SWUFE)

Date Written: January 14, 2022

Abstract

The "homemade leverage" conjecture by Modigliani and Miller (1958) implies that firm leverage and its investors' leverage are substitutes. Using the data of margin loans by Chinese stock investors, we test if investors take fewer margin loans on a stock when the company increases leverage. Based on a sample of 2,445 bank loan announcements, we find a significant decline in the use of margin loans by investors immediately after these leverage-increasing events. This effect is stronger for firms with higher institutional ownership and lower leverage. These findings suggest that investors undo the change in firm leverage by adjusting the use of margin loans, supporting the "homemade leverage" conjecture.

Suggested Citation

Liu, Chunbo and Niu, Zilong, Leverage Made at Home: Investors' Margin Loan Usage and Firm Leverage (January 14, 2022). Available at SSRN: https://ssrn.com/abstract=4008872 or http://dx.doi.org/10.2139/ssrn.4008872

Chunbo Liu

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

55 Guanghuacun Street
Qingyang area
Chengdu, Sichuan 610074
China

Zilong Niu (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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