Study Of Impact Of Margin Trading On Financial Leverage Of Underlying Firms

Margin trading has been officially started in 2010 and it has seen rapid development ever since. Studies at home and aboard have indicated that margin trading positively improves the liquidity of underlying stocks and enhances stability of stock prices, while the latter two, in turn, influence a firm’s financial leverage and capital structure. Meanwhile the difference between stock price and stock value, a market timing, to some extends affects the capital structure and financial leverage. Most researches focus on the impacts of margin trading on the stock market and the underlying stocks. Most researches at home and abroad regard margin trading as an integrated sbuject to study the impacts on the stock market and underlying stocks, and base their analysis on the viewpoint of financing. Nowadays some seperate margin trading and short sale, but focus on the problem of corporate governance and financial management to check if margin trading exerts negative influence on earnings management, seldom have they carried out analysis to regard it as a market timing which influence capital structure. The ever-changing environment forces firms to enhance profiting ability and expand developement. Currently, financial management focuses of firms have increasingly rested on the balancing of capital structure, financial leverage application and the effects. In this paper, margin trading, an external factor of trading mechanism, is linked with the underlying firm’s financial leverage to study the impact of margin purchase and short sale on degree of financial leverage, financial risk, financial leverage raio as well as the positive and negative effect. The goal is to draw more attention of the firms to the impacts of securities market on the financial leverage, so as to better adapt to the external environment and achieve stable development.Giving a review of current researches at home and abroad, this paper bases on foundamental theories of capital structure, systematically applies both theoretical method and empirical analysis. Adopting the indicator of the relationship among margin purchase,short sale and stock liquidity, the financing balance ratio and short balance ratio that investors deliver information with regard to the tendency of stock have been introduced as variables in this thesis. And the emprical study, combining margin trading with company financial leverage, builds yearly panel data of 140 target companies to study the impacts of margin trading on company financial leverage. Regression analysis is applied to establish regression equations of margin purchase and short sale with regard to degree of financial leverage,financial leverage ratio and degree of earnings ratio where the ratios of firm size and profitability of firm as well as other factors are control variables. Empirical analysis finds the following results:the impacts of margin purchase and short sale on degree of financial leverage and long-term debt ratio is not obvious; the margin purchase is negetively correlated, however, the relationship between short-term debt ratio are neglectable. Compared with margin purchase, short sale’s influence on degree of earnings ratio are more obvious. Final results suggest that the impacts of margin trading on financial leverage ratio and capital structure,even financial leverage effect. Finally, our empirical results gives managerial suggestions based on the current situation of margin trading in China.