Research On The Motivation And Economic Consequences Of Share Pledge Of Major Shareholders

As one of the financing means of listed companies,a share pledge alleviates financial obstacles for listed companies and presents such merits as a low loan threshold,extensive fund sources,and minimal restrictions on use.The A-share market has witnessed more than 50% of companies’ share pledge to varying degrees by the end of2021.Nonetheless,the risks behind share pledges are also revealed by the frequently forced closing of share pledge events in the capital market.If major shareholders engage in high-proportion and high-frequency share pledges,the gap between control rights and cash flow rights will be further widened,which strengthens major shareholders’ motivation for tunneling.In that sense,major shareholders may resort to actions that harm the interests of both the company and minority shareholders,thereby thwarting the long-term growth of the company.On that account,probing into the motivation and economic consequences of major shareholders’ share pledges not only profoundly reveals the negative effects of such a financing approach and promotes the rational use of share pledges,but also protects the interests of both the company and minority shareholders,thereby creating a sound context for China’s capital market.First and foremost,this paper expounds on the research background and research significance of major shareholder’s share pledge by means of case-based study,eventbased study,and comparative analysis in light of the information asymmetry theory,the principal-agent theory and the ownership-operation separation theory.By analyzing the process of major shareholders’ share pledges in Jiuding Investment Company,this paper reveals such problems existing in its share pledge as high proportion and high frequency,repeated pledge and non-standard information disclosure.Thereafter,this paper probes into the motivation behind major shareholders’ share pledges in Jiuding Investment Company,as well as explicitly explores the economic consequences of major shareholders’ share pledges.The research yields the following findings.Firstly,Jiuding Investment Company is burdened with an adverse financing environment and capital deficit,while share pledge financing can surmount these obstacles without altering the control rights.The primary motivations behind major shareholders’ share pledges include meeting financing demands,maintaining control rights and recovering investment costs in alternative ways.Secondly,major shareholders’ share pledge will send a signal to the market that the company or the major shareholders are caught up in financial distress,thus striking panic in investors who accordingly sell off the company’s stocks,thereby triggering drastic fluctuations in stock price and negative market response.Thirdly,the gap between control rights and cash flow rights will be further widened after the share pledge,and major shareholders will intensify the efforts of interest encroachment and commit embezzlement from listed companies by means of related-party transactions,investment activities,external guarantees,etc.,thereby jeopardizing the interests of both the company and minority shareholders.Fourthly,frequent share pledge activities with enormous sum exert negative impacts on the company’s financial situation,and such impacts mainly manifest themselves in low quick ratio,unsatisfactory turnover capacity,serious decline in profitability,stagnation of main business,etc.This may finally pull the company into an unstable financial situation,hence lagging behind its competitors in the industry.Fifthly,investors’ confidence dwindles away due to major shareholders’ share pledges,which triggers a decline in stock price.Besides,major shareholders tend to hold more cash in the company to avoid potential transfer of control rights,thereby leading to less distribution of cash dividends and damaging the interests of minority shareholders.Sixthly,considering the information asymmetry between the pledgee and major shareholders,the pledgee is faced with disposal risks if the stock price falls to the closing line.This paper further probes into the internal and external causes behind the adverse economic consequences of major shareholders’ share pledge and puts forward suggestions regarding such adverse economic consequences in Jiuding Investment Company.From the internal perspective,it is suggested to refine the equity balance mechanism,set up the incentive mechanism of independent directors and raise minority shareholders’ consciousness to safeguard their own rights.From the external perspective,it is suggested to refine the information disclosure system for share pledges,strengthen the supervisory role of the pledgee,and reinforce the intensity and widen the scope of punishment.