The Indirect Effects of Trading Restrictions

Stock market trading restrictions affect stock prices and liquidity directly through constraints on investors’ transactions, and indirectly by altering the information environment. We isolate the indirect effect by analyzing how stock market restrictions affect corporate bonds. Exploiting the staggered relaxations of trading restrictions in the Chinese stock market as a quasi-natural experiment, we document that the easing of trading restrictions on a firm’s stock decreases the credit spread of its corporate bond. This effect is stronger for firms with less transparency or lower credit ratings. Our evidence suggests that the effect is likely due to improved stock price informativeness.