The Indirect Effects of Trading Restrictions

Abstract

Stock market trading restrictions directly affect stock prices and liquidity via constraints on investors’ transactions. They also have indirect effects by altering the information environment. We isolate these indirect effects by analyzing the effect of stock market restrictions on the corporate bond market. Using the staggered relaxation of the restrictions on margin trading and short selling in the Chinese stock market as a quasi-natural experiment, we find that the relaxation of these restrictions on a firm’s stock reduces the credit spread of its corporate bond. This effect is more pronounced for firms with more opaque information or lower credit ratings.