Assistant Professor, School of Finance, Nankai University 

Upload/File/2019/11/20191120111918205.pdf

This paper studies how improved equity market efficiency dampens economic cycles by suppressing household credit expansion. I exploit a regulatory experiment that randomly selected a group of pilot listed firms and removed their short-selling restrictions from 2004 to 2007. Some of these pilot firms are banks involved in residential mortgage origination. Using a difference-in-differences specification, I find that the growth rate of mortgage origination is lower for the treated banks by 25 to 54 percentage points. This pattern is observed for portfolio mortgages but not for securitized mortgages. Counties with higher market shares of the treated banks prior to the treatment experienced less deterioration in housing markets, unemployment rates, and per capita income during the Great Recession. The findings shed light on the role of equity market efficiency in the stability of the real economy.