Share‐pledging and the cost of debt

Puleo, Michael; McDonald, Michael; Kozlowski, Steven E.

doi:10.1111/acfi.12603

Cited by 18 publications

(12 citation statements)

References 46 publications

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“…Although a growing body of literature discusses share pledging, there is a lack of research on the effect of share pledging on the relationship between stock market and corporate development. Share pledging can increase liquidity, reduce the cost of debt in real assets, stimulate the economy at the macro level and keep shareholders and corporate profits consistent [ 30 , 31 ]. However, Dou et al [ 32 ] and Ni et al [ 33 ] both documented that share pledging would increase downside risk and reduce the value of firms.…”

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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“…Typically, private financing is more costly and risky than public financing. In contrast, equity financing is convenient, fast and transferable [ 36 ], which can reduce the financing costs and effectively make up for the shortage of private financing. Undoubtedly, there are risks, such as investor misunderstanding, which could result in a stock price crash [ 37 ] or a transfer of control [ 38 ], thus major shareholders will take comprehensive consideration before stock pledge.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

M&A goodwill and corporate technological innovation: The mediating moderating effect of stock pledges

et al. 2022

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Identifying whether and how merger and acquisition (M&A) goodwill influences corporate technology innovation is a critical topic in the context of growing M&A activities. Based on the panel data of 2,634 Chinese non-financial listed companies from 2007 to 2019, this paper adopts multiple linear regression and the Bootstrap method to investigate the impact of M&A goodwill on corporate technological innovation and the mechanism through which M&A goodwill affects technological innovation. The results show that: (1) There is a significant negative correlation between M&A goodwill and technological innovation input, with financial constraints acting as the main channels. (2) Non-private corporations enjoy a higher level of financing capacity in terms of debt and equity compared with private corporations, resulting in the absence of the disincentive effect of M&A goodwill on corporate technological innovation inputs, despite the fact that M&A activities also cause massive resource consumption. (3) Stock pledges by controlling shareholders are effective in alleviating the negative impact of M&A goodwill on technological innovation inputs. Furthermore, our results highlight that simple stock pledge measures capture a significant influence of alleviating financing constraints, thereby decreasing the adverse impact of M&A, and hence need to be adequately considered in future M&A and innovation studies. While enriching the literature on the economic consequences of M&A and the research on stock pledge, this paper also provides micro-evidence for an in-depth understanding of the effect of M&A goodwill on technological innovation.

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“…In particular, 2017 to 2020 saw a large number of outbreaks of controlling shareholder equity pledges by listed companies in mainland China, followed by debt defaults by the listed companies under their control 1 . Although prior studies have documented the influence of corporate insiders' behavior on corporate financial policy (Du et al, 2014 ; Dou et al, 2019 ; Puleo et al, 2021 ), this study explores how the share pledge of ultimate owner affects the debt risk of listed companies from the perspective of debt policy choices.…”

Section: Introductionmentioning

confidence: 99%

Shareholder personal risk and firm risk: An empirical analysis of share pledges and firm debt policies

Xia

Zhang

et al. 2022

Front. Psychol.

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The impact of personal risk caused by controlling shareholders' equity pledges on the company's debt policy is an issue worth exploring. Using Chinese A-share listed companies from 2006 to 2020, this paper studies the impact of ultimate owner equity pledges on firm debt size and debt maturity structure and explores the mechanism of ultimate owner personal leverage on firms. The results show that the increase in ultimate owner stock pledges leads to higher financial leverage and a longer debt maturity structure for the company. In addition, the study reveals that the high personal leverage of the ultimate owner of the pledged equity is an influential mechanism driving the transfer of personal risk to the firm. In particular, even if a company's actual debt ratio is higher than its target debt ratio, equity pledges can prompt listed companies to increase their debt ratios and debt maturities, causing them to take on excessive debt risk and transfer the risk to creditors. It follows that the tunneling effect is a driving force of equity pledging and corporate debt policies. These results remain robust after the robustness test and endogenous test. The conclusions of this paper not only emphasize the impact of shareholders' personal risk on the firm but also provide a reference for investors' perception of firm risk.

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Share‐pledging and the cost of debt

Cited by 18 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

M&A goodwill and corporate technological innovation: The mediating moderating effect of stock pledges

Shareholder personal risk and firm risk: An empirical analysis of share pledges and firm debt policies

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