Study On The Economic Consequences Of Stock Pledge By Controlling Shareholders

With the development of the modern enterprise system and capital market,the focus in the field of corporate governance has gradually evolved from the early "the conflict between shareholders and managers" to "the conflict between minority shareholders and controlling shareholders".Equity pledge is exactly an important way for controlling shareholder to obtain private benefits.By the end of 2017,the controlling shareholders of nearly 40% of listed firms in China’s stock market have pledged their stocks and the firm proportion is still rising.More importantly,the stock pledge by more and more controlling shareholdings may lead to systemic financial risk,which will seriously affect the healthy development of capital market and the smooth running of financial system in China.Based on the introduction of research background and the literature review about stock pledge,this dissertation firstly analyzes the situation and the problem caused by stock pledge of listed companies in Chinese capital market.Secondly,taking SHENZHEN COSHIP ELECTRONICS CO.,LTD as an example,the dissertation analyzes the motivation of the stock pledge of its controlling shareholder,and then investigates the economic consequences of stock pledge from the perspectives on both market valuation and financial performance.Finally,practical suggestion for policy making are given.The results show that,as an increase in the proportion of pledged equity,the increase in the separation between control rights and cash flow rights will cause an increase in the possibility that the controlling shareholder encroaches the listed company,which is accompanied by the decline of firm profitability,the increase of financial risk and the increase in the probability of being issued non-standard audit opinions,and so on.Specifically,for COSHIP ELECTRONICS CO.,LTD,the encroachment way used by the controlling shareholder includes asset swap,increasing receivables from related-parties,providing illegal guarantee for related-parties.As far as economic consequences,the encroachment not only reduces the market valuation of COSHIP,but also causes a bad financial performance in subsequent years.In terms of policy suggestions,the improvement of internal and external corporate governance as well as information disclosure about equity pledge is an important and effective way to restrain controlling shareholders from tunneling listed companies by pledging their shares.