Controlling Shareholder’s Equity Pledge,Information Transparency And Stock Price Volatility Risk

The equity pledge business has been developed in the capital market for nearly three decades since the equity pledge system was introduced in China’s guarantee law in 1995.Among them,the Shanghai and Shenzhen Stock Exchanges and the China Securities Depository and Clearing Corporation jointly issued the "Measures on Stock Pledge Repurchase Transactions and Registration and Settlement Business" in 2013,stating that the on-market pledge repurchase business was launched simultaneously on the Shanghai Stock Exchange and the Shenzhen Stock Exchange,which marked the official launch of on-market trading of stock pledges mainly by securities companies,after which the equity pledge business stepped into a After this,the equity pledge business entered a more rapid stage of development.Compared to traditional financing methods such as bank loans,equity pledges were sought after by listed companies for their short process,rapid lending,flexibility in terms of maturity and pledge rates,etc.It quickly became one of the main ways for controlling shareholders of listed companies to obtain funds.In the few short years since then,the market share and size of equity pledges have increased rapidly.However,there are risks associated with equity pledging.If the price of the underlying stock plunges and the controlling shareholder fails to cover it as soon as possible,the pledgee has the right to forcibly close out the position and transfer the controlling shareholder’s control,which in turn will affect all aspects of the business and development of the enterprise,and will also cause the market to suffer a shock,leading to drastic fluctuations in share prices and,in serious cases,systemic risk.In addition,in the market,the price of a share is itself a signalling mechanism,which reflects the stability of the stock market.Violent fluctuations in share prices can impair the efficiency of resource allocation and price discovery functions of the capital market,resulting in a decrease in the efficiency of capital financing in the stock market,which is not conducive to the normal functioning of our capital market.In an environment where equity pledges are becoming an increasingly normal form of financing,research and analysis of the impact of controlling shareholders’ equity pledges on the risk of share price volatility can not only help market investors avoid losses,but also contribute to the healthy development of the financial market and promote the efficient allocation of market resources.This paper firstly compares and reviews the development history of equity pledging business in China,then summarises the relevant literature on controlling shareholder equity pledging and share price volatility risk,on the basis of which it analyses and proposes hypotheses in conjunction with relevant theories of the Commission.Secondly,in the empirical study,this paper examines the relationship between controlling shareholder shareholding pledge,information transparency and share price volatility risk,and further analyses the relationship according to the nature of ownership,the level of independent directors and the shareholding ratio of institutional investors.This paper finds that:(1)Pledging of controlling shareholders’ equity significantly increases the risk of share price volatility.(2)The mediation effect test shows that controlling shareholder equity pledges affect share price volatility risk by influencing information transparency.(3)In listed companies that are not state-controlled,have a low level of independent directors and have a low percentage of institutional investors’ shareholdings,equity pledging by controlling shareholders is more likely to increase the share price volatility risk of the companies.The findings of this paper provide useful reference for companies to rationalise their equity pledging business,reduce the risk of share price volatility and allocate resources appropriately.