Share pledges and firm value

Abstract

Share pledging occurs when investors use their shareholding as collateral to obtain personal loans. In China, the practice of share pledging has grown exponentially in recent years, with potentially significant impacts on non-pledging shareholders, especially given high agency conflicts between controlling and minority shareholders. We empirically examine the relationship between share pledges and firm value. Using a sample of pledges by major shareholders of listed Chinese firms from 2003 through 2015, we find a positive association between share pledging and firm value. This relationship is moderated by the presence of state ownership and higher ownership concentration. Overall, we provide empirical evidence on the impacts of share pledging in the Chinese capital markets, with our findings having significant implications for investors, managers, and regulators.

Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market

“…Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market [5,7,23], our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with Li et al [14] who show that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms' exposure to downside risk associated, share pledging can play a more positive role in our setting.…”

Controlling Shareholder Stock Pledge, Aggravated Expropriation and Corporate Acquisitions

“…Using the data from listed firms in the US, Chen, and Hu (2018) show that the announcement of insider pledging has no significant impact on shareholders' wealth and that oneyear abnormal stock returns after the disclosure is even positive. Li, Liu, and Scott (2019) use a sample of Chinese listed firms and document a positive association between share pledges by the largest shareholder and firm value. They provide additional evidence, consistent with the signaling explanation, for such a positive correlation reflecting the controlling shareholder's confidence in a firm's operation, profitability, and the sustainability of its stock price in the future.…”

“…Yan, and Zhang, 2019); more earnings management (DeJong, Liao, and Xie, 2020; Signgh; 2018) and reduced innovation productivity . However, on the other hand, some research concludes that the stock pledge is not harmful to shareholder wealth and is even positively associated with firm value by arguing that the pledging can signal the corporate insider's confidence in a firm's future performance (e.g., Chen and Hu, 2018;Li, Liu, and Scott, 2019).…”

“…To shed light on this debate, we empirically examine, for the first time in the literature, how the controlling shareholder stock pledge would affect corporate merger and acquisition (M&A) 3 decision and associated performance based on the sample of listed firms in China. There is an increasing tendency for the stock pledge to be made by controlling shareholders of Chinese listed firms over the last decade as compared to firms operating in other global economies (e.g., Chan et al, 2018;Li, Liu and Scott, 2019). As far back as the early days of the establishment of the Chinese financial market, serial-related regulations and laws were developed to provide legislative endorsement for the use of stock pledging as collateral (the PRC Security Law, 1995; the PRC Guarantee Law, 1995).…”

“…The unique characteristic of the stock pledge has attracted extensive attention from the academia. Prior studies mainly focus on the effect of stock pledge on equity risk (e.g., Chen et al, 2018;Dou et al, 2019), firm valuation (Dou et al, 2019;Li, Liu, and Scott;, corporate innovation , dividend policy (Li, Zhou. Yan, and Zhang, 2019), share repurchase (Chan et al, 2018) and executive compensation (Ouyang et al, 2019).…”