Controlling Shareholder Equity Pledge Motivation And Economic Consequences

Ownership structure is an important problem in corporate governance. Recent studies show that there is a controlling shareholder in many listed firms all over the world. Under such an ownership structure, the core agency problem is not between the shareholders and the managers, but between the minority shareholders and the controlling shareholder who gets private interest by controlling rights. This problem is more serious in the market environment with poor minority investor protection.In Chinese listed firms, it is common for controlling shareholders to pledge their stocks. According to the database, the percentage of listed firms whose controlling shareholders pledge their stocks is about one third. Furthermore, for these firms, the stock pledge rate is quite high, the maximum is 61%. Recent case studies imply that stock pledge will lead to grievous economic consequence and harm the minority shareholders' interest. That is because of two reasons: on one hand, stock pledge hints that the controlling shareholders have a strong requirement for cash; on the other hand, the controlling shareholders transfer out their risk of the unsteady stock price. So, it is significant and valuable for theory and practice to study the stock pledge. However, in China, there is less attention paid by researchers to such a problem.Focusing on the stock pledge, this paper describes the present situation of such a problem and analyzes behavior of the controlling shareholders. We think that stock pledge will reduce the controlling shareholders' cost to tunnel the firm, and thus impact the firms' operating efficiency and lead to serious conflicts between the controlling shareholders and minority shareholders.The empirical evidence shows that stock pledge has economic consequence: the stock pledge aggravates the controlling shareholders' tunneling, brings down the firms market value and reduces the firms' operating efficiency. In chapter 7, this paper analyzes the determinants of the stock pledge and finds that controlling shareholders from private firms or holding more stocks are more prone to pledge their stocks. Also we find the evidence that other big shareholders will restrict the controlling shareholders' stock pledge. This paper supplies the evidence for the economic consequences of the stock pledge and the basis for the market regulating. And it is one of the first researches on the stock pledge from the economic perspective in China. Therefore it has somecontributions.