Does Share Pledging Affect Management Earnings Forecasts?

Wang, Xin; Xiong, Jiacai; Ou, Jitao

doi:10.1080/1540496x.2020.1776695

Cited by 12 publications

(7 citation statements)

References 12 publications

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“…Zhao et al (2019) find a relationship between top management’s positive tone and share pledging. Similarly, Wang et al (2020) observe that the management earnings forecasts of the pledged firms are more optimistic than for non-pledged firms. Hu et al (2021) document that the pledged firms could even collude with financial analysts to manipulate the market as analysts intentionally produce optimistic forecasts for pledged firms.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 89%

Do auditors respond when listed firms pledge shares? Evidence from China

Kong

Huang

2023

PAR

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Purpose This paper investigates whether the audit fees of Chinese listed firms are associated with the share pledging practice of the firm’s controlling shareholders. Design/methodology/approach This study uses the audit pricing model to estimate the association between the share pledging of listed firms and audit fees. Cross-sectional analysis is conducted on a large sample of Chinese listed firms during the period 2004 to 2019. The authors further test the moderating effects of listing on the Main Board, state ownership and abnormal audit report lag on the association between share pledging and audit fees. The results remain robust to various endogeneity tests including two-stage least squares instrumental variable analysis, entropy balancing analysis and difference-in-difference analysis. Findings The study finds that audit fees are positively associated with the proportion of shares pledged by the listed firm’s controlling shareholder in China. The results also provide new evidence that the positive association between audit fees and the share pledging of controlling shareholders could be mitigated if the firm is listed on the Main Board and/or it is a state-owned enterprise. In contrast, pledged firms with abnormal audit report lag are found to have higher audit fees than their pledged counterparts without the excessively long audit delay. Practical implications Findings of this study have important practical implications to those charged with governance, as boards need to comprehensively understand the adverse consequences of share pledging when pursuing it as the firm’s major source of financing. The study also has policy implications for stock market regulators such as the China Securities Regulatory Commission in China. Regulators could consider developing a threshold-based share pledging disclosure and pledge ratio requirements based on factors such as a firm’s listing status and ownership structure. Originality/value This study provides new evidence on the audit-related consequences of share pledging in a significant capital market. Findings of this study also enrich the existing audit literature by introducing the share pledging activities of controlling shareholders into the audit pricing decision-making model.

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Section: Literature Review and Hypotheses Developmentmentioning

confidence: 89%

Do auditors respond when listed firms pledge shares? Evidence from China

Kong

Huang

2023

PAR

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“…To maintain their control rights, controlling shareholders may adopt opportunistic measures to elevate stock prices, including share repurchases [ 33 , 34 ], reductions in future innovation activities [ 44 , 45 ] and excessive financialization behavior [ 35 ]. Share pledging also has a negative impact on firms’ reporting quality: Insiders who pledge shares are incentivized to conceal negative news, make positive financing reports or manipulate earnings to elevate stock prices [ 3 , 4 , 6 , 7 ]. Hu et al (2021) argued that, when facing the threat of losing control rights, controlling shareholders even collude with analysts to make optimistic forecasts [ 5 ].…”

Section: Institutional Background Hypothesis Development and Related ...mentioning

confidence: 99%

“…In cross-regional financial markets, certain key shareholders in listed firms tend to pledge their holding shares to creditors for debt financing. Studies document that share pledging exacerbates information opacity [ 1 , 2 ]: Pledging shareholders have an incentive to manipulate earnings [ 3 , 4 ], make optimistic forecasts [ 5 , 6 ] and suppress negative news [ 7 ] to maintain control rights during the pledging period. While such opportunistic behaviors benefit pledging shareholders by boosting stock prices, the effects tend to be short-lived [ 8 ].…”

Section: Introductionmentioning

confidence: 99%

Share pledge and accounting conservatism in share-pledging firms: Evidence from a natural experiment in China

Wang,

Sun,

et al. 2024

PLoS ONE

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This paper focuses on firms in which insiders pledge their shares as collateral for loans. By investigating a natural experiment—China’s enactment of provisions on share reductions that restrict pledge creditors’ cashing-out behavior—we find that pledging firms exhibited more conservative financial reporting after the implementation than non-pledging firms. This effect was pronounced in firms with a higher ratio of pledged shares, a longer maturation period of the pledged shares, and more concentrated pledge creditors. Additionally, we show that pledging firms increased their accounting conservatism after the shock, leading to a lower risk of margin calls and stock price crashes. The effect on accounting conservatism was stronger in firms with controlling pledgers or when the pledge creditors were banks. Our results remained consistent after we performed several robustness tests. These behaviors are economically logical because the provisions heighten creditors’ liquidity risk and the potential losses of loan default. Pledging shareholders embrace more accounting conservatism to mitigate creditors’ concerns about agency costs and avoid triggering margin calls. Our findings provide direct support that creditors have a real demand for accounting conservatism and highlight the impact of shareholder-creditor conflicts on the financial reporting policies of pledging firms.

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“…If there are no excess assets or stocks to make up for the gap, the previously pledged stocks are likely to be forcibly sold by the pledgee, triggering a battle for corporate control of enterprise. In order to prevent the transfer of control rights, controlling shareholders may conduct a series of stock price manipulation behaviors, such as earnings management [6,16] and information disclosure [1,11]. Therefore, the pledge risk caused by the decline in stock prices reduces the quality of information disclosure, increases the degree of information asymmetry, and deepens the second type of agency conflict [12].…”

Section: Theoretical Framework and Hypothesis Developmentmentioning

confidence: 99%

Insider Share-Pledging, Implicit Guarantees and Financing Constraints: Based on CSMAR Database

Liu¹

2023

Atlantis Highlights in Computer Sciences

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Financing constraint has always been an important factor hindering the healthy development of China's real economy. Share pledging is the common financing method in the current mainland capital market, and the implicit guarantees affect the difficulty of financing. This paper is to investigate the impact of share pledging caused by major stockholders to the financing constraints. Taking a-share listed companies in Shanghai and Shenzhen stock exchanges from 2005 to 2020 as samples, we select ordered logistic regression with five indicators to measure the degree of financing constraints, and examine the relationship between equity pledging and financing constraints based on multiple regression model. The results suggest that equity pledging is correlated with the company's financial constraint. Besides, the implicit government guarantees significantly alleviate this impact. We further contribute to the literature on financing constraints and equity pledging by discussing the choice of business strategy during the period of insider equity pledging.

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Does Share Pledging Affect Management Earnings Forecasts?

Cited by 12 publications

References 12 publications

Do auditors respond when listed firms pledge shares? Evidence from China

Do auditors respond when listed firms pledge shares? Evidence from China

Share pledge and accounting conservatism in share-pledging firms: Evidence from a natural experiment in China

Insider Share-Pledging, Implicit Guarantees and Financing Constraints: Based on CSMAR Database

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