Overvalued Equity and Investment: A Regression Discontinuity Approach

Abstract

This paper exploits a regulatory experiment that lifts the margin trading ban in China to examine the real effects of speculative retail investors. Using a regression discontinuity design, I find that margin trading eligibility causes an increase in share turnover and stock prices, and that marginable firms cater to investor short-termism by manipulating earnings and reducing long-term investment. Consistent with managerial myopia, marginable firms experience a decline in operating profit and equity valuation in the long run. My results suggest that margin traders, as short-term speculators, pressure the manager to focus on current earnings and sacrifice long-term growth.