Asymmetric information and opportunism in insider share-pledging

Abstract

PurposeAmid growing attention from investors, regulators and advisory firms in recent years, this study assesses whether managers exploit private information to time share-pledge transactions and extract personal benefits while avoiding unintended market scrutiny.Design/methodology/approachWe use hand-collected pledging data for a random sample of S&P 1500 firms to examine whether private information influences insider share-pledging activity using Heckman selection and two-part hurdle models of the pledge decision. We also conduct an event study analysis of announcement returns to measure market reactions to pledging news and determine whether share-pledge disclosures affect investor risk assessments.FindingsConsistent with insiders timing pledges prior to anticipated performance declines, both the likelihood and level of pledging increase significantly with negative earnings surprises. New share-pledges precede significant decreases in abnormal returns, and public announcement of new pledging corresponds with significant negative cumulative abnormal returns. The evidence suggests that insiders exploit private information to time pledges, and that investors update risk assessments and value estimates based on information conveyed by these transactions.Practical implicationsOur findings hold important implications for governance and regulation of pledged shares, indicating that permissive reporting requirements in the US facilitate informed pledging and may undermine incentive alignment between managers and shareholders. The analysis promotes transaction-specific disclosures and transparent corporate policies for insider share-pledging.Originality/valueOurs is among the first empirical analyses of share-pledging in US firms and the first to examine the role of private information in pledging decisions. We offer novel evidence on the opportunistic use of pledged shares and provide insight to predictors of share-pledging behavior.

Linkages between share pledging, stock price risk and profitability: Evidence from the P.R. China

“…Similarly, we carried out another robustness check by using down and up volatility (DUVOL) as a proxy of stock price risk. These results are summarized in Columns (7)(8)(9)(10). Columns (7) and (9) show that the relationships between stock price risk and firm's profitability as the coefficients of DUVOL were both significantly negative.…”

“…These results are summarized in Columns (7)(8)(9)(10). Columns (7) and (9) show that the relationships between stock price risk and firm's profitability as the coefficients of DUVOL were both significantly negative. Moreover, DUVOL � Pledge has a significant coefficient of -0.241, indicating that share pledging played an amplifying role in stock price risk hindering corporate development, supporting the robustness of previous conclusions.…”

“…On the one hand, the controlling shareholder will lose control of the enterprise if the pledged shares are forced to be sold amid stock market turbulence, which may lead to further uncertainty [ 8 ]. On the other hand, the firm’s value is expected to increase because of the managerial opportunism of the pledging shareholder [ 9 ]. They will take additional actions to signal the market that the future stock price will not decrease, and a stable price will benefit corporate development [ 10 ].…”

Promoter share pledging and dividend payouts in India: does family involvement matters?

“…The present findings align seamlessly with the outcomes of prior research endeavours, substantiating the argument that promoter share pledging serves as a prevalent self-serving strategy, particularly in the context of heightened agency conflicts. This assertion is corroborated by a comprehensive review of relevant literature, including studies by Anderson and Puleo (2020), Li et al (2020), Puleo and Kozlowski (2021) and Xu and Huang (2021). Collectively, these scholarly investigations provide robust support for the contention that promoter share pledging is not merely a financial manoeuvre but, rather, a strategic tool deployed by promoter groups to navigate and mitigate agency conflicts, concurrently serving as a conduit for securing personal benefits.…”

“…Anderson and Puleo (2020) illustrate that influential insiders exploit this mechanism to secure personal gains, often at the expense of external minority shareholders. Correspondingly, Puleo and Kozlowski (2021) underscore concerns by revealing a correlation between heightened levels of insider share pledges and substantial abnormal share returns. Furthermore, these insiders, armed with firm-specific information, strategically time their pledging activities.…”