Insider share pledging and firm value consequences under the COVID-19: evidence from China

Xiao, He; Chen, Xin; Fang, Heyang; Zhang, Yifei

doi:10.1080/00036846.2021.1946476

Cited by 9 publications

(7 citation statements)

References 46 publications

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“…Investors often have negative expectations for the firms’ experiencing huge stock shocks. According to Xiao et al [ 47 ], market investors are more pessimistic about share pledging during challenging periods. For example, pledged shares’ mandatory liquidation triggered by the 2015 Chinese stock market crisis led to a stock price crash due to investors’ irrational behavior [ 34 ].…”

Section: Literature Review and Research Hypothesesmentioning

confidence: 99%

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

Zhang

Ortiz

2021

PLoS ONE

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Share pledging has become popular as a method of loan collateral among Chinese shareholders. Our research used a sample of Chinese listed firms between 2008–2018 and produced two main findings. Firstly, we found a negative association between stock price risk and firm profitability. Our second finding was that the interaction effect of share pledging and stock price risk is greater on firm profitability than the effect of stock price risk itself. We examined the role of share pledging by modeling pooled OLS and fixed effects using share pledging behavior, controlling shareholders’ share pledging and the share pledging ratio to reinforce the robustness of our results. Furthermore, we investigated the Davis Double Play effect of share pledging to analyze how share pledging affects stock price risk. We found that higher EPS and investor expectations cannot mitigate the positive impact of share pledging on stock price risk. That is, the reduction of EPS and the deterioration of investor expectations caused by share pledging risk will not further aggravate the stock price risk, as shareholders may have taken some managerial actions to affect the transmission mechanism.

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Section: Literature Review and Research Hypothesesmentioning

confidence: 99%

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

Zhang

Ortiz

2021

PLoS ONE

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“…The share pledging market experienced fast growth following a regulation on the approval of share pledge repurchase transactions which was issued on 24th May 2013 by Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Depository and Clearing Corporation (Xiao et al , 2021). The standardization of share pledge repurchase transactions simplifies the process of share pledge and lowers the financing costs and therefore motivates shareholders to use share pledge as one of their major financing channels.…”

Section: Share Pledging In Chinamentioning

confidence: 99%

“…5.3.3 Difference-in-difference analysis. As explained earlier, the 2013 regulation on the approval of share pledge repurchase transactions simplified the process of share pledging and reduced financing costs (Xiao et al, 2021). The 2013 regulation provides shareholders with stronger incentives to use share pledge as one of their major financing channels.…”

Section: Evidence From Chinamentioning

confidence: 99%

“…China is also considered to be a unique research setting for this empirical question for two reasons. The first is a regulation on the standardization of share pledge repurchase transactions, launched in 2013 (Xiao et al , 2021), which further incentivizes controlling shareholders to use share pledging as a primary source of financing. The second is the share pledging disclosure requirements introduced in May 2017 by the China Securities Regulatory Commission (CSRC).…”

Section: Introductionmentioning

confidence: 99%

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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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“…In line with this argument, the prior literature has shown that controlling shareholders' share pledging can induce expropriation behaviors, such as tunneling resources from firms (Kao et al, 2004), and have negative effects on shareholder wealth (Dou et al, 2019). In the specific setting of COVID‐19, Xiao et al (2021) showed that share pledging had a negative impact on firm value in the highly pandemic‐affected regions in China. Some studies provide evidence of the negative association between share pledging and innovation input, measured by research and development (R&D), and innovation output, measured by patents granted (Pang & Wang, 2020; Wang et al, 2020).…”

Section: Introductionmentioning

confidence: 99%

The impact of share‐pledging purposes on firm performance and innovation

Jia

Jiang

Wang

2023

Corporate Governance

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Research questionShare pledging by controlling shareholders can be motivated by business or personal purposes. We investigate whether the firm performance and innovation outputs are different for firms with controlling shareholders pledging shares to support their firm's financing (business‐pledging firms) and those pledging shares for increasing personal wealth (individual‐pledging firms).Research findingsUsing data from publicly listed Chinese firms, we find that business‐pledging firms are associated with higher changes in Tobin's Q and more patent outputs compared with individual‐pledging firms. In additional tests, we show that the impact of share‐pledging purposes on firm performance and innovative outputs is more pronounced for Chinese non‐state‐owned enterprises, which have relatively limited access to traditional bank loans.Theoretical implicationsIn this study, we bring new empirical evidence to agency theory, especially the “principal–principal” problem. We identify two inherently different purposes in share‐pledging cases—business pledging and individual pledging. We show that in business‐pledging cases, pledgers' interests become more aligned with outside shareholders, and pledgers have higher incentives to enhance firm value and innovation productivity, relative to individual pledging. This paper adds to the evidence on the bright side of share pledges.Practitioner implicationsThis paper sheds light on the recent policy debate regarding the costs and benefits of share pledging and has implications for regulators and investors. Thus, it may be vital for publicly listed firms to disclose the purposes of share pledging.

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Insider share pledging and firm value consequences under the COVID-19: evidence from China

Cited by 9 publications

References 46 publications

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

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

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

The impact of share‐pledging purposes on firm performance and innovation

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