Share pledges, tone of earnings communication conferences, and market reaction: evidence from China

Abstract

We investigate how share pledging affects firms’ disclosures and influences investors in Chinese stock market. The tone of firm disclosures when there are shares pledged by controlling shareholders is more positive than that of firms without them. Considering tone inflation motivation and ability simultaneously, we find share pledge risk has an inverted U‐shaped relation with tone. Investors react positively to tone in short‐run windows, and firms with controlling shareholders’ pledges have higher stock returns for earnings communication conferences. We identify an inverted U‐shaped link between margin distance of controlling shareholders and stock returns for earnings communication conferences.

Controlling shareholders' stock pledges and strategic change: the moderating effects of corporate governance

“…Second, our study expands research on stock pledging's economic consequences. Most prior studies have focused on stock pledging's effects on firm value, shareholder wealth (Li et al, 2019) and market reaction (Zhao et al, 2019), but few have explored the effects of stock pledging on firms' strategic behavior (Chan et al, 2018;Pang and Wang, 2020), especially the corporate strategies that guide firms' strategic behavior. Our study addresses this gap by shedding light on the effects of controlling shareholders' stock pledges on abstract corporate strategy.…”

“…Since annual reports generally provide prioryear data for comparison purposes, we included 2011 data in the dataset. Following prior studies' practices, and considering this study's characteristics, we screened the sample firms as follows: (1) we excluded firms in the financial sector because their financial characteristics and accounting standards were very different from those of other listed firms (Xu et al, 2019); (2) we also excluded listed firms with Special Treatment status due to irregularities in their business operations (Schuler et al, 2017); (3) firms that had been listed for less than one year (Zhang et al, 2015) and ( 4 (Chan et al, 2018;Zhao et al, 2019;Pang and Wang, 2020), we adopted the following two methods to depict controlling shareholders' stock pledges. First, we created a dummy variable for controlling shareholder stock pledge (PE), which was equal to one if the controlling shareholder of the firm had any stock pledged at year-end, and zero otherwise.…”

“…Stock pledging occurs in many countries/regions around the world (Li et al, 2019). Recently, controlling shareholders pledging their shares to secure loans from financial institutions has become common in many of these countries/regions' capital markets (Chan et al, 2018;Zhao et al, 2019). Even though stock pledging is simply economic behavior by controlling shareholders aimed at easing their financial constraints, and has nothing to do with the firm's business decisions (Pang and Wang, 2020), if the firm's share price falls below the pledge's closeout threshold, the controlling shareholders may be forced to sell their shares, and thus lose their control over the firm (Chan et al, 2018).…”

“…Even though stock pledging is simply economic behavior by controlling shareholders aimed at easing their financial constraints, and has nothing to do with the firm's business decisions (Pang and Wang, 2020), if the firm's share price falls below the pledge's closeout threshold, the controlling shareholders may be forced to sell their shares, and thus lose their control over the firm (Chan et al, 2018). Shareholders who have pledged stock have incentives to reduce the risk of losing control triggered by a share price drop (Zhao et al, 2019;Pang and Wang, 2020); meanwhile, control over the firm is a key condition upon which controlling shareholders engage in self-serving behavior . Under this background, we argue that controlling shareholders who have pledged stock are very likely to adopt change-avoiding tactics that reduce the risk of control transfer, at the expense of other shareholders' interests (type II agency conflict between the controlling shareholder and other shareholders intensifies) (Chan et al, 2018).…”

Controlling Shareholder Stock Pledge, Aggravated Expropriation and Corporate Acquisitions

“…The relatively excessive control rights enable controlling shareholders to take self-serving corporate policies while lower cash-flow rights would lead to entrenchment problems and increase the incentives of the large shareholder to expropriate (Bozec and Laurin, 2008). Therefore, a longterm stock pledge would result in prolonged excessive voting rights of controlling shareholders, thus encouraging them to pursue private benefits at the expense of minority shareholders (Bozec and Laurin, 2008;Wang and Chou, 2018;Zhao et al, 2019;Ouyang et al, 2019;Li, Zhou. Yan, and Zhang, 2019).…”