Research On The Risk And Consequence Of Controlling Shareholder’s Equity Pledge

With the rapid development of the domestic capital market in recent years,the number of listed companies has been increasing and the demand for financing has been growing.Equity pledges are favoured by many shareholders as a form of financing that can bring in funds quickly,with simple procedures and few restrictions and without changing the control of shareholders.By the end of 2021,more than 2,500 listed companies had pledged or were in the process of pledging equity,with a cumulative total of 419,827 million shares pledged and a market value of RMB4.18 trillion pledged,and the scale of equity pledging continues to expand.Although equity pledges have obvious advantages over other forms of financing,frequent and high proportional equity pledges can also pose risks that cannot be ignored.In recent years,there have been frequent blowouts due to equity pledges,which have had a significant impact on the market and investors.It is therefore necessary to study the causes of equity pledges,the risks and consequences of equity pledges,and also to provide practical reference for listed companies and investors.The subject of this thesis is Investment Company A,which is one of the listed companies in the financial industry with a high proportion of pledges and a high number of pledges.This article takes into account the shareholding structure of Investment Company A,combing through the company’s equity pledge announcements between 2016 and 2021,analysing the possible motives of the company’s controlling shareholders in making equity pledges,and exploring the risks and consequences arising from the frequent and high proportion of equity pledges by the controlling shareholders of Investment Company A based on relevant theories.The study found that the controlling shareholder of Investment Company A may choose to pledge its equity frequently and at a high ratio for the reasons of satisfying corporate financing needs,maintaining the controlling shareholder’s control and avoiding risks.By analysing the possible loss of control risk,market risk and financial risk arising from its equity pledges,it was found that:(1)a high proportion of equity pledges will aggravate the separation of shareholders’ control and cash flow rights,and if the separation of the two rights is serious,the greater the possibility that the controlling shareholder will face the risk of losing control and the resulting benefit encroachment will intensify;(2)in a market environment with information asymmetry,the equity pledges(2)In a market environment of information asymmetry,the company’s excess cumulative return is declining after the pledge of equity,and the high proportion of equity pledges releases negative signals to the market,causing market investors to doubt the company’s operating conditions and generating negative market reactions,and the company’s share price will face the risk of falling.(4)The frequent pledging of a high proportion of equity has also affected the financial position of the company.From the financial indicators,the current ratio of investment company A has increased,the gearing ratio has decreased and the solvency has become stronger,but the profitability has decreased,the operating capacity is poor and the Z value is unstable,which brings financial risks.In response to the risks and the resulting impact consequences,this thesis makes the following recommendations: Investment Company A should strengthen the checks and balances on absolute control,improve its internal risk warning system,constrain the pledge ratio and timing,strengthen the supervision of information disclosure on equity pledges and increase penalties.