Share Pledges and Firm Value

Abstract

Share pledging occurs when investors use their shareholding as collateral to obtain personal loans. In China, the practice of share pledging has grown exponentially in recent years, with potentially significant impacts on non-pledging shareholders, especially given high agency conflicts between controlling and minority shareholders. We empirically examine the relationship between share pledges and firm value. Using a sample of pledges by major shareholders of listed Chinese firms from 2003 through 2015, we find a positive association between share pledging and firm value. This relationship is moderated by the presence of state ownership and higher ownership concentration. Overall, we provide empirical evidence on the impacts of share pledging in the Chinese capital markets, with our findings having significant implications for investors, managers, and regulators