We examine the association between margin requirements and the market’s efficiency in incorporating firm-specific and market-level public news. Combining the Fed’s 22 changes in margin requirements with a hand-collected sample of earnings announcements between 1934-1975 we show that higher margin requirements induce greater delay in incorporating earnings information into prices. We draw similar conclusions when we analyze the Hou and Moskowitz (2005) price delay measure as well as indirect measures of leverage constraints over recent years. Further tests suggest that despite the Fed’s expressed intent to curtail excess speculation higher margin requirements restrict trading by arbitrageurs more than noise traders.
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market efficiency leverage constraints margin requirements limits to arbitrage post-earnings announcement drift PEAD