Share Repurchase Plan Under The Pledge Of Controlling Shareholders’ Equity:"Value Signal" Or "Self-Interested Tool"?

Stock repurchases have developed rapidly in China’s stock market in recent years.The market generally believes that if the share price deviates from the company’s value,managers will launch a repurchase program for market value management out of confidence in the company’s development prospects and future performance,so stock repurchases are usually seen as a "value signal".At the same time,equity pledges,as a convenient and low-cost financing method,are also common among listed companies.When the controlling shareholder of a company uses equity pledges for financing,it will face the risk of transferring control due to the decline in share price,and the controlling shareholder has an incentive to mitigate this risk by arranging a share repurchase program to boost the share price,which is then seen as a "self-interested tool".Therefore,this paper seeks to explore two central questions: are companies with controlling shareholders’ equity pledges more likely to adopt share repurchase programs for market value management? Is the real motive of repurchase in this case a "value signal" or a "self-interested tool" ?This paper explores the impact of controlling shareholders’ equity pledges on the launch probability and launch motives of share repurchase programs,using quarterly data of China’s A-share market from 2014-2021 as a sample.We first empirically examine the impact of the existence of controlling shareholder equity pledges and the pledge ratio on the probability of repurchase program launch,and then explore the relationship between short-term market reaction and long-term performance of repurchase program launch and repurchase,respectively,to determine whether the real motivation for repurchase is "value signal" or "self-interested tool" at this time.The real motive of repurchase is "value signal" or "self-interested tool".Finally,this true motive is further verified by further analyzing the impact of three factors,namely,the closing pressure,the degree of economic development of the region in which the firm is located,and the quality of the firm’s own development,on the probability of launching a share repurchase program under controlling shareholders’ equity pledges.Through empirical research,this paper finds that in the context of equity pledges,controlling shareholders are more likely to take advantage of the limited rationality of investors and implement share repurchase programs to send positive signals to the market to boost share prices and thus mitigate the risk of control transfer,and the probability increases with the growth of the pledge ratio.The introduction of repurchase programs can have a positive market reaction in the short term and there is no significant difference between the pledged and non-pledged groups,but in the long term,repurchases can significantly reduce the company’s performance,indicating that share repurchase programs under controlling shareholders’ equity pledges are not "value signals" but rather "self-interested tools" for shareholders.Further research shows that the positive effect of pledges on repurchases is more pronounced in companies with higher liquidation pressure and in companies with relatively poor economic fundamentals in their regions,further supporting the paper’s findings.This paper contains eight chapters: Chapter 1 is the introduction,which introduces the background,significance,research ideas and innovations of this paper;Chapter 2 is the literature review,which focuses on the motivation and economic consequences of equity pledges,the motivation and market reaction of stock repurchases,and the relationship between equity pledges and stock repurchases;Chapter 3 is the theoretical analysis and research hypotheses,which presents four hypotheses based on the theoretical analysis.Chapter 4 is the research design,which introduces the sample selection,variable treatment and model construction;Chapter 5 is the empirical analysis,which focuses on the regression analysis of the model to verify the hypotheses;Chapter 6 discusses the robustness and endogeneity issues of the previous empirical analysis,Chapter 7provides further analysis,and Chapter 8 compares and summarizes the findings of the full study and makes relevant recommendations.This paper explores the relationship between share repurchases and equity pledges in the context of the growing maturity of China’s stock repurchases and equity pledges,and argues from the perspective of behavioral finance that share repurchase programs do not send entirely positive signals to the market,and are often motivated by the self-interested behavior of controlling shareholders.The findings of this paper both complement existing research on the motivation of share repurchases and enrich research on the impact of controlling shareholders’ equity pledging behavior.