On Controlling Shareholders’ Tunneling Behavior Under Equity Pledge

Equity pledge refers to the financing behavior of a company’s shareholders who mortgage their stocks to securities brokers,banks and other pledge parties to obtain funds.In recent years,equity pledge has grown rapidly in number of times,shares and market value.Due to flexibility and convenient operation,equity pledge has become an important financing channel for shareholders.But at the same time,cases of controlling shareholders’ tunneling behavior under equity pledge emerge in an endless stream that seriously damage the interests of public companies and minority shareholders.Tunneling behavior contains a variety of different means and is not easy to be found,and it seriously damages the interests of public companies and minority shareholders.Though equity pledge itself may not be detrimental to companies,it’s closely linked with tunneling behavior.Starting from theory,this paper first describes related concepts and connotations of equity pledge and tunneling behavior and explores the connection between them.Based on the theoretical analysis,this paper studies on the equity pledge and tunneling behavior of a typical company’s controlling shareholder,finds the connection between them,analyzes specific tunneling channels and their economic consequences,and provides some advices.The paper enriches the researches on the agency problem of controlling shareholders and related issues of equity pledge,and provides reference for the governance of agency behavior and the standardization of pledge behavior.This paper selected Protruly Company as its research object,whose controlling shareholder provided false agreements and suspected related transactions in the process of asset restructuring with Zhongda Group in order to increase the valuation,obtain more equity and greater control,as well as gain more capital in the later equity pledge.It indicated that the controlling shareholder may have tunneling motivation before equity pledge.After Protruly Company’s backdoor listing,its controlling shareholder pledged nearly all of his equity from 2015 to 2017.Equity pledge does not necessarily lead to the tunneling behavior,but it will increase the tunneling motivation of controlling shareholders to some extent.On the one hand,equity pledge exacerbates the separation of control right and cash flow right which aggravates the problem of agency.On the other hand,the capital raised from equity pledge can provide financial support for tunneling behavior,at the same time,if the value of equity falls below the financing amount,controlling shareholders can choose to give up equity directly for the tunneling cost is less than the reduction of equity value.Through further analysis,it is found that the controlling shareholder of Protruly Company embezzled the company through substantial investment,occupation of operating capital and illegal guarantee.It eventually lead to serious deterioration of the company’s financial condition and serious damage to the interest of the company and its stakeholders like shareholders,employees and creditors.The paper analyzes the causes of tunneling behavior of controlling shareholders under equity pledge from different perspectives and provides some advice.First,companies and other shareholders should pay attention to controlling shareholders’ pledge behavior and pledgee should continue to focus on controlling shareholders’ equity pledge.Second,external regulatory agencies should strengthen the information disclosure of the equity pledge and increase the cost of violation.Third,companies should strengthen corporate governance structure and internal control system to strengthen supervision of controlling shareholders.Last but not least,external institutions should strengthen the quality of practice.Regulators also should increase the cost of external institutions’ violation.The innovation of this paper lies in the research perspective and research method.Firstly,this paper focuses on the connection between equity pledge and tunneling behavior which enriches correlative research on the influence of equity pledge on tunneling behavior.Secondly,this paper takes theoretical basis as the clue to analyze controlling shareholder’s equity pledge and to find the evidence of his tunneling behavior in a specific case.This research method can provide some reference for analysis in similar cases.