Effects of Credit Expansions on Stock Market Booms and Busts.

The article investigates the causal impact of a major expansion in margin lending on stock prices in China between 2010 and 2015, a period marked by a significant deregulation that allowed margin purchases of equities. Using event studies, regression discontinuity designs, and institutional investor holdings data, the study finds that the introduction of margin lending caused a substantial increase in stock prices—about 25% cumulative returns within 60 trading days for eligible stocks—and that this effect was largely anticipated and front-run by deep-pocketed institutional investors such as mutual funds. The authors develop a dynamic stock-pricing model with an exponential information revelation structure to rationalize the gradual price run-up prior to deregulation, estimating that over 60% of the price impact was priced in six months before the event. Additionally, the study provides suggestive evidence that margin debt contributed to the 2015 Chinese stock market boom and subsequent bust, with stocks having higher margin debt experiencing larger price reversals during the crash. Overall, the findings highlight that major credit expansions via margin lending can significantly influence equity prices and market dynamics, especially in contexts where retail investors are constrained and institutional investors anticipate regulatory changes.