Controlling Shareholder Stock Pledge, Aggravated Expropriation and Corporate Acquisitions

Abstract

This study examines the effect of controlling shareholder stock pledge on corporate acquisition decisions and associated performance. Using the sample of listed firms in China, we find that pledging firms, consistent with the aggravated expropriation hypothesis, initiate more takeovers, and further, acquisitions conducted by pledging firms obtain lower announcement returns. We address the endogenous concerns by using the instrumental variable and the difference in differences approaches. Moreover, our channel tests suggest that pledging acquirers overpay in the deals and are more likely to be involved in related party transactions. Cross-sectionally, we find that the relationship between the share pledge and returns is stronger for non-SOEs and firms with high-level free cash flow. Lastly, we find that pledging acquires underperform in the long-run in terms of lower ROA and a greater likelihood of goodwill impairment. Overall, our findings indicate that controlling shareholders increasingly expropriate minority shareholders' interest through self-serving corporate takeovers after the stock pledge.