Leverage-Induced Fire Sales and Stock Market Crashes

Bian, Jiangze; He, Zhiguo; Shue, Kelly; Zhou, Hao

doi:10.2139/ssrn.3047460

Cited by 4 publications

(3 citation statements)

References 17 publications

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“…We also controlled for the ownership of a leverage account in investor-level regressions. However, since we do not observe the shadow leverage investors took during this period (Bian et al 2018a;Bian et al 2018b), we cannot speak to the effect of shadow leverage on volume.…”

Section: Discussionmentioning

confidence: 86%

“…There is no transaction cost. The stock, potentially subject to a bubble, is a claim to a dividend D T paid on the 4 A few papers examine 2014-2015 market crash using account-level data from brokerage firms: Bian et al (2018a) study leverage networks and market contagion Bian et al (2018b) study the contribution of leverage-induced fire sales to the market crash. final date T , where D T is given by the process…”

Section: The Setupmentioning

confidence: 99%

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Price and Volume Dynamics in Bubbles

2018

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We propose a framework to explain the sharp rise in prices and volume observed in historical financial bubbles. The model generates a novel mechanism for volume: due to the interaction between beliefs and preferences, investors are quick to buy assets with positive past returns, but also quick to sell them if the good returns continue.Using account-level transaction data on the 2014-2015 Chinese stock market bubble, we test the model's predictions about volume and find supportive evidence. We also empirically show that, consistent with the model, extrapolators are largely responsible for the price run-up and crash during the bubble. * Peng is indebted to Nick Barberis, James Choi, Will Goetzmann, and Kelly Shue for guidance and encouragement. For helpful comments, we thank Jiangze Bian,

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Section: Discussionmentioning

confidence: 86%

Section: The Setupmentioning

confidence: 99%

Price and Volume Dynamics in Bubbles

2018

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“…Investment Management and Financial Innovations, Volume 20, Issue 4, 2023 http://dx.doi.org/10.21511/imfi.20(4).2023.31 & Reisel, 2013) and the use of financial leverage (Ngatemin et al, 2018).The relationship between growth and leverage is also reflected in the signals received from the market, where companies with a high ratio of market equity compared to book value often indicate growth potential(Bian et al, 2017). Although some capital structure theories suggest that debt can inhibit growth, companies with high growth potential tend to maintain lower debt levels because they are careful in managing the risk of loss reserves (Septyanto & Nugraha, 2021).…”

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confidence: 99%

Company value analysis: Sales, assets, growth opportunities and leverage in LQ-45 companies (Indonesia Stock Exchange)

Gunarianto,

Puspitosarie,

Hadi Susilo

2023

Investment Management and Financial Innovations

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Company value plays a significant role in investment decisions, company performance assessment, and risk analysis. In addition, there is uncertainty or inconsistency in the relationship between factors such as sales, assets, and leverage that can affect company value. The study aims to analyze the effect of sales growth, asset growth, and leverage on company value in companies listed on the Indonesia Stock Exchange, especially in the LQ-45 index during the 2021–2022 period. The research method uses a quantitative approach with statistical tools and hypothesis testing. Regression analysis through path analysis models is used to test the proposed hypothesis. The results showed asset growth of 15.42%, debt-equity ratio of 1.7797, and high Price to Book Value (36.2721). Nonetheless, leverage does not act as a mediator in the relationship between asset growth and company value, defying the Modigliani-Miller theory. The finding highlights the complexity of such factors in the context of LQ-45 companies, emphasizing the need for prudent asset management and debt policy to enhance competitiveness. The findings have important implications for financial management and business strategy in a dynamic and competitive environment.

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Saving China’s Stock Market?

2019

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What were the economic bene…ts and costs of preventing a stock market meltdown during the summer of 2015 by the Chinese government intervention? We answer this question by estimating the value creation for the stocks purchased by the government between the period starting with the market crash in mid-June and the market recovery in September. We …nd that the government intervention increased the value of the rescued …rms with a net bene…t between RMB 5,697 and 6,635 billion, which is about 10% of the Chinese GDP in 2014. The value creation came from the increased stock demand by the government, the reduced default probabilities, and the increased liquidity.

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Leverage-Induced Fire Sales and Stock Market Crashes

Cited by 4 publications

References 17 publications

Price and Volume Dynamics in Bubbles

Price and Volume Dynamics in Bubbles

Company value analysis: Sales, assets, growth opportunities and leverage in LQ-45 companies (Indonesia Stock Exchange)

Saving China’s Stock Market?

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