The Potential Built-in Supply Effect from Margin Trading in the Chinese Stock Market

Yanxi Li; Siu Kai Choy; Mingzhu Wang

doi:10.1111/fire.12309

The Potential Built-in Supply Effect from Margin Trading in the Chinese Stock Market

Yanxi Li, Siu Kai Choy, Mingzhu Wang^*

^*Corresponding author for this work

Accounting & Financial Management

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

Utilizing a unique daily data set, we examine how the covering of margin positions affects earnings announcement returns in the Chinese stock market dominated by retail traders. Unlike previous research on forced covering during price crashes, we propose that margin interest acts as a built-in supply and find that intensive covering of margin positions pushes down stock prices during earnings announcements of extreme good news. The release of builtin supply leads to stronger post-earnings-announcement drift (PEAD) after good news compared with that after bad news, consistent with investors’ tendency to realize profits after a gain under the disposition effect.

Original language	English
Pages (from-to)	835-861
Number of pages	27
Journal	Financial Review
Volume	57
Issue number	4
Early online date	8 Jun 2022
DOIs	https://doi.org/10.1111/fire.12309
Publication status	Published - Nov 2022

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10.1111/fire.12309

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title = "The Potential Built-in Supply Effect from Margin Trading in the Chinese Stock Market",

abstract = "Utilizing a unique daily data set, we examine how the covering of margin positions affects earnings announcement returns in the Chinese stock market dominated by retail traders. Unlike previous research on forced covering during price crashes, we propose that margin interest acts as a built-in supply and find that intensive covering of margin positions pushes down stock prices during earnings announcements of extreme good news. The release of builtin supply leads to stronger post-earnings-announcement drift (PEAD) after good news compared with that after bad news, consistent with investors{\textquoteright} tendency to realize profits after a gain under the disposition effect.",

author = "Yanxi Li and Choy, {Siu Kai} and Mingzhu Wang",

note = "Funding Information: We would like to thank the editor Michael Goldstein, two anonymous referees, Suxin Yin and Yung Chiang Yang for their valuable comments. We thank King's College London for financial support. This research did not receive any specific grant from funding agencies in the public, commercial, or not‐for‐profit sectors. Publisher Copyright: {\textcopyright} 2022 The Authors. The Financial Review published by Wiley Periodicals LLC on behalf of Eastern Finance Association.",

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N2 - Utilizing a unique daily data set, we examine how the covering of margin positions affects earnings announcement returns in the Chinese stock market dominated by retail traders. Unlike previous research on forced covering during price crashes, we propose that margin interest acts as a built-in supply and find that intensive covering of margin positions pushes down stock prices during earnings announcements of extreme good news. The release of builtin supply leads to stronger post-earnings-announcement drift (PEAD) after good news compared with that after bad news, consistent with investors’ tendency to realize profits after a gain under the disposition effect.

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The Potential Built-in Supply Effect from Margin Trading in the Chinese Stock Market

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