Factors Affecting Changes in Broker Credit Directives in the Colombo Stock Exchange of Sri Lanka

Abstract

Regulators use changes in market credit directives to control the potential destabilizing speculative behavior of investors and to inhibit excessive stock market volatility. This paper investigates macroeconomic and market factors associated with regulatory changes in broker credit directives in the Colombo Stock Exchange of Sri Lanka. We use a unique sample of changes in broker credit directives issued by the Securities and Exchange Commission of Sri Lanka during the high volatility period from 2010 to 2012 and employ a probit regression model to examine the factors affecting changes in such directives. We find that inflation, industrial production growth, trading volume, and market volatility significantly impact changes in broker credit directives. Although stock market returns and growth in broker credit volumes show no impact standing alone, they exert an important influence together. The SEC's regulatory actions on broker credit seem to be driven by market volatility, stock returns, and growth in broker credit volume.