Margin Regulation and Market Quality: A Microstructure Analysis

G. Alexander, E. ÖRS, M. Peterson, P. Jo. Seguin

Journal of Corporate Finance: Contracting, Governance and Organization

September 2004, vol. 10, n°4, pp.549-574

Departments: Finance, GREGHEC (CNRS)

We find that trading volume increases and market liquidity remains unchanged, while the adverse selection and order-processing cost components of the spread increase and decrease, respectively, after margin levels decline when stocks become margin-eligible. This evidence indicates that the information content of trades has increased, thereby improving market quality. However, no changes were detected after the 1997 regulatory reforms. These results have implications across a broad swath of corporate finance dimensions, including the (1) cost of capital, (2) public vs. private financing decision, (3) form of managerial compensation, (4) type of ownership structure, and (5) degree of shareholder monitoring