Equity Pledge,Share Repurchase,and Downside Risk Of Stock Price

Equity pledge refers to the behavior in which shareholders use their equity as collateral for debt financing.Equity pledges have been very common in the A-share market in recent years.However,equity pledges may bring some risks while improving the convenience of the funding.When the company’s stock price falls to the warning line or the liquidation line,the controlling shareholder who undertakes the equity pledge will be faced with additional pledged shares or equity redemption;otherwise,the pledged shares may be forcibly liquidated by the pledgee.If the controlling shareholder commits a high proportion of shares,once the shares are forcibly liquidated,it may lose the status of the controlling shareholder.Therefore,the controlling shareholder must be motivated to adopt market value management to mitigate the risk of equity pledges.As a behavior of buying stocks in the secondary market with the listed company’s own funds,share repurchase of listed companies is used by listed companies to transmit positive signals to the market at many critical moments,which is helpful to stabilize and raise stock prices.Due to the information advantage of listed companies,when they judge that the stock price is lower than the intrinsic value of the company,they will send positive signals about the company’s future earnings and cash flow to the market through share repurchase,to show their confidence in the company’s stock price.Based on the sample of A-share listed companies from 2014 to 2021,this paper empirically analyzes the relationship between equity pledges,share repurchase,and stock price downside risk.The results show that:(1)Equity pledges by controlling shareholders can significantly promote share buyback by listed companies,and this relationship is more evident in the bear market environment;(2)Share repurchases by listed companies can significantly reduce the downside risk of stock price.Still,the inhibitory effect of share repurchases on the downside risk of the stock price is less in listed companies with equity pledges;(3)There is a higher probability of adverse market reaction after the stock buyback announcement of the listed company with an equity pledge.After controlling for the potential endogeneity problems,the conclusions of this paper are still valid.The research conclusion of this paper shows that under the background of the equity pledge of controlling shareholders,controlling shareholders are likely to carry out share repurchases to manage their mortgage risks.The strong market value management motivation of controlling shareholders and management may not necessarily be the undervaluation of the company’s stock price.Still,it may also be a means for controlling shareholders to "hollow out" the listed company for personal gain.The conclusion of this paper has specific risk implications for small and medium-sized investors to objectively and rationally view the "positive" information related to share repurchase.