Research On The Economic Consequences Of Controlling Shareholder’s Stock Pledge

The domestic capital market’s equity pledged business has achieved"explosive" development since the equity pledged off-site business developed in 2013.Due to the low threshold of equity pledged and the quicker financing speed,it can solve the financing constraints and financial dilemmas that the company faced.The equity pledge only pledged the property rights such as the right to the proceeds of this part of the equity,and shareholders still retain control of it.Therefore,more and more shareholders of public company choose this financing method.However,as the equity pledge business developing rapidly,there are more stock crisis arised in the capital market,which brought great risks to the company’s operation and the healthy development of the capital market.Therefore,the analysis of the economic consequences of equity pledge for the company is needed,which is of practical significance to help public companies make reasonable use of equity pledges,protect the interests of small and medium shareholders,and improve relevant laws and regulations of external regulatory agencies.This article first reviews and summarizes the literature of domestic and foreign scholars on equity pledges,reviews the development history and institutional background of domestic equity pledge business,and organize the current domestic capital market public companies’ equity pledges and controlling shareholder equity pledges combining the relevant theoretical foundations.And the article further selected the case of Geo-Jade Petroleum to analyze the specific application and economic consequences of equity pledge in the company.The reason why selecting Geo-Jade Petroleum was the proportion and frequency of equity pledge of its controlling shareholders were relatively high,and it was the first public company in the domestic capital market that suffered liquidation crisis in 2017.So this case could expose more characteristics and potential risks of equity pledge.Analyzing the economic consequences of controlling shareholder’s equity pledge in Geo-Jade Petroleum could bring more reference value to similar companies.This article organizes the equity pledge information of the case company and the capital operation throughout the equity pledge process,then analyses the economic consequences of controlling shareholder’s stock pledge from the following four aspects:the path that equity pledge impact the company,the impact on the interests of small and medium shareholders,the market’s short-term response to equity pledge,and the company’s long-term financial performance and company value during the equity pledge.The results show that:(1)During the company’s asset reorganization activities,the controlling shareholder used the equity pledge as a blood transfusion for related parties,the operating and non-operating funds of the public company were occupied,and the high proportion of rolling pledge of the controlling shareholder exacerbated the risks facing the public company.(2)In the years when the controlling shareholder’s equity was pledged,the company’s performance in operation and profitability was poor,and the annual cash dividends were taken less frequently,resulting in the interests of small and medium shareholders having suffered certain losses.(3)The short-term response to the controlling shareholder’s equity pledge in the market is negative.The disclosure of equity pledge information is insufficient and delayed.Market investors are difficult to understand the purpose and capital use of the equity pledge due to asymmetric information.Therefore,the controlling shareholder has a large proportion of equity pledge Did not actually send a positive signal to the market.(4)In the past few years when the controlling shareholder pledged a large proportion of equity,the company’s long-term financial performance has performed poorly from several perspectives,including debt repayment ability,operating ability,profitability,and development ability.The market value has declined,and the liquidation event has also seriously affected the company’s market value performance.After analyzing and summarizing the economic consequences of the controlling shareholder’s equity pledge of Geo-Jade Petroleum,this article puts forward relevant suggestions from the perspectives of pledger,pledgee and supervision departments.It is expected that this article could offer reference value and feasible measures about how to make the company pledging equity more efficient and reasonable,the financial institutions avoiding risks,protecting the interests of small and medium shareholders and promoting capital to develop in a healthy way.