The Capital Market Economic Consequences Of Controlling Shareholder Share Pledging

In Chinese capital market,for the purpose of supplementing operational capital,investing in other venture projects,mergers and acquisitions,and meeting personal financial needs,the controlling shareholders(the pledgors)of listed firms usually pledge their shares to take loans from financial institutions.In recent years,share pledging by controlling shareholders has been widespread in Chinese A-share market.Although share pledging plays an active role in alleviating the financing constraints of controlling shareholders,the risks caused by controlling shareholder share pledging are gradually exposed due to the macro-environment change and market fluctuations.The risk of forced liquidation caused by controlling shareholder share pledging has raised great concerns in the regulators and the market.Share pledging is the financing behaviour of shareholders of listed firms,which seems to have little association with the listed firms.However,as pledgors,the controlling shareholders have a special position in the listed firms.On the one hand,share pledging will change the behaviour of the controlling shareholders;on the other hand,once controlling shareholders face the forced liquidation crisis,it may lead to the change of the control rights of the listed firms,which in turn affects the listed firms' share price,operating performance,and information disclosure.Based on the above background,this study explores the impact of controlling shareholder share pledging on controlling shareholder information disclosure manipulation and tunnelling behaviour using the data of controlling shareholder share pledging of the listed firms from year 2008 to 2017.Further,this study explores whether the information risk and agency conflicts caused by controlling shareholder share pledging will enhance investors' perceived risk of the listed firms,which in turn leads to investors requiring a higher risk premium.The main findings of this study are as follows:(1)Controlling shareholder share pledging reduces information disclosure quality of the listed firms,and this “reduction effect” is stronger in non-state-owned enterprises.The mechanism test shows that controlling shareholders manipulate the information disclosure of the listed firms through accrued earnings management and real earnings management,strategic management earnings forecast and reducing accounting conservatism,which in turn reduces information disclosure quality.Further analysis shows that,as the information disclosure quality decreases,controlling shareholder share pledging imposes an incremental negative effect on firm performance.By conducting a sets of robustness tests,such as fixed effect model,PSM sample analysis,instrumental variable approach,lead-lag change analysis,alternative samples,alternative dependent variables,the findings still hold.(2)Controlling shareholder share pledging aggravates the behaviour of controlling shareholder tunnelling,that is,controlling shareholder share pledging has an “expropriation effect”.The logic of this “expropriation effect” is that controlling shareholder share pledging aggravates the separation of control rights and cash flow rights of the controlling shareholders,enables controlling shareholders to recover their investment in advance,and to transfer the risk of stock price crash to minority shareholders.Moreover,non-state-owned ownership and group-affiliation aggravates the “expropriation effect” of controlling shareholder share pledging,but strong corporate governance mechanisms,such as the monitoring of multiple large shareholders,analysts' following,and strong legal and institutional environment can abate the “expropriation effect” of controlling shareholder share pledging.Further analysis shows that,in general the market reaction of share pledging announcements is significantly negative,but the nature of shareholders and the investment direction of pledged loans will affect the market reaction.Specifically,if share pledging is initiated by controlling shareholders,the market reaction is significantly negative;if share pledging is initiated by other shareholders,the market reaction is not significant;if the share pledging loan is invested into shareholders themselves,the market reaction is significantly negative;if the share pledging loan is invested into related parties,the market reaction is negative to some extent;if the share pledging loan is invested into the listed firm,the market reaction is not significant.These results further support the hypothesis of the “expropriation effect” of controlling shareholder share pledging.Finally,by conducting a series of robustness tests,such as fixed effect model,change model,PSM sample analysis,instrumental variable approach,alternative samples,alternative dependent variables,the findings still hold.(3)Controlling shareholder share pledging increases the listed firms' cost of equity capital.This result suggests that share pledging motivates controlling shareholders to manipulate information disclosure of the listed firms and expropriate minority shareholders' interests,which enhances the investors' perceived risks and leads to investors demanding higher risk premium.Cross-sectional analysis shows that the impact of controlling shareholder share pledging on cost of equity capital is stronger in firms with higher information asymmetry,weaker monitoring by multiple large shareholders,weaker regional legal and institutional environment,and in nonstate-owned enterprises.Further analysis shows that information risk and agency conflicts related to controlling shareholder share pledging are systemic risks,which also increases the listed firms' cost of debt.Finally,by conducting a sets of robustness tests,such as fixed-effect model,PSM sample analysis,instrumental variable approach,alternative samples,alternative dependent variables,the findings still hold.