Analysis On The Economic Consequences Of Equity Pledge Of Listed Companies

The cash flow of an enterprise is related to its sustainable survival and plays a crucial role in its daily operation.Usually,an enterprise needs to make up the fund gap in operation through various financing methods.At present,among the existing financing methods in China,the common traditional financing method is to make loans through commercial banks.In this financing method,commercial banks will take very strict consideration of the qualifications of loan applicants.And the application procedures are relatively complex.Meanwhile,banks will require the enterprises applying for loans to provide additional guarantees.In this case,equity pledge has been welcomed by many private listed companies due to its high efficiency,strong liquidity and few restrictions compared with traditional financing methods.Its size peaked in 2018.However,many potential risks have been exposed in the course of the development and implementation of the pledge business.Since 2017,many listed companies have been causing market turbulence due to the problems caused by pledge of shares.Finally,the regulatory authorities have to issue new pledge regulations to restrain the pledge of shares of listed companies,so as to further stabilize the market.Because the concentration of the ownership structure in private enterprises tends to aggravate the agency conflict between the controlling shareholders and the minority shareholders,intensify the deviation degree of the two rights of the controlling shareholders,and then lead to the possibility of interest infringement on the company and the minority shareholders,and bring various economic consequences to the company.In this paper,KM Company,a listed company in the traditional Chinese medicine industry,is selected as the research object to study the economic consequences brought by the pledge of its major shareholders,hoping to provide warnings and Suggestions to other listed companies and relevant supervisory departments.This paper first briefly introduces the background significance and research methods of this study,and then summarizes relevant domestic and foreign literature,and briefly describes the concept and theoretical basis of the right pledge involved in this paper.Then the case of KM company is introduced in this paper.Starting from the overall situation of equity pledge of listed companies in China,the background of equity pledge of companies is introduced.Combined with the corporate governance structure and the pledge process of controlling shareholders,the economic consequences caused by equity pledge of shareholders are analyzed in the following paper.Research mainly from the company during the period of the pledged equity and management problems of the company’s financial performance change two Angle analysis,calculation of the controlling shareholder of deviation degree,using event study research after the pledge has accumulated excess yield change,analysis of a variety of financial indicators and Tobin’s Q change trend,trying to research from several aspects equity pledge to KM company economic consequences.The results show that equity pledge meets the capital needs of KM company.Second,there are loopholes in the corporate governance structure.The separation of the two rights provides an opportunity for the controlling shareholders to infringe on their interests,prompting them to seek personal gains by taking advantage of high control rights and low risks,thus exacerbating the agency problem with small and medium-sized investors.Third,equity pledge has adverse consequences on the short-term stock price,long-term financial performance and corporate value of the company,which harms the interests of small and medium-sized investors and ultimately leads to the loss of confidence of small and medium-sized investors in the enterprise.Finally,this paper proposes Suggestions based on the research results:listed companies should constantly improve their corporate governance structure,relevant external regulatory agencies should strengthen the supervision of pledge behavior,improve the relevant legal system to standardize the disclosure of pledge information as soon as possible,and finally reduce the risks brought by pledge of equity to companies and the market.