The “homemade leverage” conjecture by Modigliani and Miller (1958) implies that firm leverage and its investors’ leverage are substitutes. Using the data of margin loans by Chinese stock investors, we test if investors take fewer margin loans on a stock when the company increases leverage. Based on a sample of 2,600 bank loan announcements, we find a significant decline in the use of margin loans by investors immediately after these leverage-increasing events. This effect is driven by the post-announcement increase in margin loan repayment and is stronger for firms with higher institutional ownership. The findings suggest that investors undo the change in firm leverage by adjusting the use of margin loans, supporting the “homemade leverage” conjecture. 

JEL classification: G32, G11, G51

Keywords: Homemade leverage, margin trading, loan announcement.​