Does Stock Pledging by Controlling Shareholder Affect Systematic Tail Risk?

Abstract

It is a ubiquitous corporate governance phenomenon in many countries that shareholders pledge their ownership as collateral to obtain personal loans, while Chinese market provides a specific institutional background to study controlling shareholders. With a sample consisted of 21,921 firm-year observations from 2007 to 2018, we find a significant casual negative impact that dominant stockholder’s share pledging has on both systematic right-tail risk and left-tail risk. Furthermore, we examine two mechanisms to explain the casual association respectively. First, we find a negative signal to the market, caused by share pledges, will reduce the systematic right-tail risk. Second, the controlling shareholder who pledges their own holdings will bring down the systematic left-tail risk through the earnings management channel. Additionally, we conduct several robustness checks like PSM, IV, alternative subsamples and an alternative independent variable to support our results are consistent.

Keywords: Stock pledges; Systematic tail risk; Signaling; Earning management

JEL Classification: G14, G18, G35