Whether The Controlling Shareholder’s Equity Pledge Will Increase The Cost Debt Of Company

In 2020,the State Council issued the Opinions on Further Improving the Quality of Listed Companies,which proposed to actively prevent and resolve the risk of equity pledges,indicating that the potential risks posed by equity pledges to the capital market have received continuous attention from the state.Equity as a pledge is characterized by high liquidity and price transparency,and equity pledges can transform equity into available dynamic capital in a short period of time.These advantages make it a convenient financing tool that is increasingly favored by listed companies,and thus the scale and number of companies with equity pledges in the capital market are at record highs.The equity pledge reflects the normal financing requirements of companies,but at the same time,the value of equity as collateral fluctuates greatly due to unstable factors such as macroeconomic policies,market environment and company’s operating conditions.Controlling shareholders may face risks that make stock price below the closing position after equity pledge,moreover,they will take various measures to interfere with the company’s operating plan in order to protect its own interests and avoid the transfer of control,even make actions that are detrimental to the long-term development of the company,which may have certain impact on the internal decision and external reputation of the company.Most of the existing literature focuses on the relationship between equity pledges and the risk of stock price collapse,the level of corporate innovation,the choice of corporate cash dividend policy,tax avoidance,and earnings management,etc.However,less literature has found the link between controlling shareholders’equity pledges and debt financing costs,and no complete research has been conducted on the specific transmission pathway between them.Therefore,this paper takes the debt relationship as the entry point and selects all listed comanies in Shanghai and Shenzhen A-shares between 2008 and 2020 as the sample,and conducts an in-depth discussion on whether the controlling shareholder’s equity pledge affects the company’s debt financing cost.We further analyzes the possible transmission mechanism between this relationship from the perspectives of external market financing constraints faced by the company and internal tunneling,as well as the differences in the performance of this relationship when the company’s short-term debt servicing pressure,investor attention,marketization degree,competitive position and growth are various.This paper selects the existence of controlling shareholders’ equity pledges and the proportion of pledged equity as explanatory variables,completes a series of basic empirical analyses,and conducts endogeneity and robustness tests by using the instrumental variables method,Differences-in-Differences,Heckman’s two-stage method,replacing explanatory and explained variables,lagged variables,changing the time interval,and adding individual fixed effects,and finally concludes that:(1)controlling shareholders’ equity pledges increase the debt financing costs of listed companies,and the corresponding debt financing costs are higher when the pledge ratio is higher-(2)The pledge of controlling shareholders’equity in both non-SOEs and SOEs will result in higher overall debt financing costs for the company,but this phenomenon is more pronounced in SOEs.(3)The pledge of the controlling shareholder’s equity has led to "malicious speculation" in the market,making it more difficult to obtain external funding and leading to a higher level of external financing constraints,which in turn has led to higher debt financing costs.(4)Equity pledges intensify the embezzlement of controlling shareholders on the company’s property,which empties the company’s resources and makes it more likely to fall into financial crises,thus increasing the risk of default,which in turn leads to higher debt financing costs.In addition,this paper further concludes that the positive effect of controlling shareholders’ equity pledges on debt financing costs is more significant when short-term debt service pressure is lower,when investors are more concerned,when marketization is higher,when the competitive position and growth of the firm is higher.Based on the above research findings,this paper proposes the following suggestions:first,to broaden the external financing channels of companies and build a diversified financing pattern;second,to strengthen company information disclosure and improve the external regulatory system;third,to improve the internal governance structure of companies and enhance the risk resistance;fourth,to increase the guidance and education of investors in the market,cultivate rational investors,reduce the phenomenon of blindly following the trend of investment,and strengthen investor protection.This paper not only enriches the literature related to the economic consequences of controlling shareholders’ equity pledging behavior and confirms that controlling shareholders’ equity pledging has a significant impact on driving up debt financing costs,but also has a crucial role for listed companies to crack financing problems,improve their business conditions,optimize internal governance,prevent pledging risks,and for the market to regulate individual equity pledging behavior so as to better use equity pledging to serve the development of the real economy.