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Leverage made at home: Investors' margin loan usage and firm leverage

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  • Liu, Chunbo
  • Niu, Zilong

Abstract

The “homemade leverage” conjecture by Modigliani and Miller (1958) implies that firm leverage and investors' leverage are substitutes. Using the data of margin loans by Chinese stock investors, we find that investors take significantly fewer margin loans on a stock when the company announces new bank loans. This effect is entirely driven by investors' margin loan repayment upon announcements, and is stronger for firms with higher institutional ownership or lower leverage. The findings suggest that investors undo the change in firm leverage by adjusting margin loans usage, supporting the “homemade leverage” conjecture.

Suggested Citation

  • Liu, Chunbo & Niu, Zilong, 2023. "Leverage made at home: Investors' margin loan usage and firm leverage," Emerging Markets Review, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:ememar:v:55:y:2023:i:c:s1566014123000158
    DOI: 10.1016/j.ememar.2023.101010
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    More about this item

    Keywords

    Homemade leverage; Margin trading; Loan announcement;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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