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Margin Trading, Short Selling and Firm Financialization: Based on a Quasi-natural Experiment of Batch Expansion

【Authors】
DU Yong, DENG Xu
【WorkUnit】
Southwest University, 400715.
【Abstract】

This paper focuses on the issue of firm financialization. Based on a quasi-natural experiment of batch expansion in China's stock market and using the DID model, this paper studies the impact of margin-trading and short-selling program in China on the financialization of non-financial corporations, and finds that the program on the whole significantly promotes the latter, mainly due to margin trading which is dominant in actual transactions. Although the short selling mechanism can curb corporate financialization to some extent, given the high asymmetry between margin trading and short selling, active financing transactions aggravate the short-term speculative arbitrage behaviors of non-financial firms in allocating financial assets. The yield gap between financial assets and operating assets and the risk of stock price decline are two key factors for firms to adjust their investment strategies. Further research finds that the impact only exists in such situations as a high proportion of managerial ownership and institutional ownership, weak market competition and bull market. This paper is helpful to understand the impact of the deregulation on margin trading and short selling. It also provides a new perspective for clarifying these companies' internal mechanism of “shift from real economy to virtual economy” in the institutional environment.

 

JEL:G18, G31

【KeyWords】
Margin Trading and Short Selling, Firm Financialization, Difference-in-difference Model, Batch Expansion