IN RECENT YEARS THE finance field has devoted considerable attention to studying the response of security returns to various stimuli. A simple, but relevant way to dichotomize these "response" studies is to designate the stimuli as either firm specific or not. Among the former group have been studies investigating the response of stock returns to reported earnings, Joy, Litzenberger and McEnally [10] and to stock splits, Fama, Fisher, Jensen and Roll [6]. The other group of studies involves investigations related to more general phenomena. Among the more noteworthy of this group have been studies analyzing the response of stock returns to changes in the money supply, Rozeff [14] and to changes in the Federal Reserve discount rate, Waud [16].Our study is of the latter kind. Specifically, we are interested in the stock market's response to changes in the initial margin requirement by the Federal Reserve. Our interest stems from several sources. First, there is the important finance question of market efficiency relative to the stimulus. While most response studies have reported results consistent with the semi-strong form of the efficient market hypothesis, some recent studies have challenged the hypothesis. Second, there is the question of whether the stimulus of concern provides information to market participants. That is, is the event an economic signal? Third, it is important to assess the impact that the Federal Reserve's intervention via margin changes has on security markets.
I. BackgroundThe Board of Governors of the Federal Reserve System (Fed) was empowered by the Securities and Exchange Act of 1934 to impose margin requirements on security loans. The apparent intent of this provision was threefold: (1) to reduce "excessive" credit in the stock market, thereby providing more credit to other sectors ofF the economy; (2) to protect buyers of stock from any harmful effects of "too much" debt; (3) to reduce price fluctuations in the stock market attributable to purchases and sales by margin customers.1Since 1934 the Fed has altered initial margin requirements a total of 21 times, there being eleven increases and ten decreases. Figure 1 summarizes the activity of the Fed with respect to margin requirements over time. Moore [11] argues that the Fed has been unsuccessful in its attempts to allocate credit, protect stockholders from excess borrowings or reduce fluctuations in the ' This articulation is essentially Moore's [11]. It represents a compilation and interpretation of U.S. House of Representative and Senate documents and a position statement by a past Fed chairman (Martin). See Moore for additional details.
Security credit regulations are administered by the Federal Reserve Board of Governors (Fed) as a result of the Securities Exchange Act of 1934. These regulations extend to individual over-the-counter (OTC) firms via the 1969 Amendment to that Act. Apart from catastrophe prevention, five objectives for extending these regulations to OTC stocks are articulated by the Fed. This paper provides empirical evidence on the efficacy of three of the objectives. The evidence suggests the Fed has been successful in pursuing its objectives.
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