| Shares pledge refers to a scenario,in which an insider,typically the controlling shareholder,uses his shares as collateral in a loan contract.Unlike corporate financing,the loan transaction occurs at the insider's personal level and hence,does not directly affect the capital structure of the firm.The shares pledge allows the insider to maintain his control of the firm at the time of the pledge and lets the insider diversify or meet other personal objectives with the loan.Thus,shares pledge becomes popular in A-shares.However,the pledge may result in a margin call against the insider,which will cause the controlling shareholder to lose the control of the firm.Once the control of the firm transfers to a new controlling shareholder,the new one may change the business strategy,management system,and change the top management,which may bring huge uncertainty to the firm.Previous studies show that the controlling shareholder's opportunistic behavior is more acute than without the pledge because he has incentives to direct firm activities to protect his control rights after the pledge,such as information manipulation,real earnings management,stock repurchase,and tax avoidance.Hence,auditors will require higher audit fee.As so far,nobody has studied the economic consequence of controlling shareholder's shares pledge on the corporate bond market.As one kind of direct financing,the cost of bond is lower than bank loan,what's more,developing the bond market is in line with the strategic planning of regulators,namely,establishing a multi-level capital market in future.In 2015,China Securities Regulatory Commission promulgated an act which reduces the threhold of issuing bond.From then on,more and more companies choose to issue corporate bond.Bond financing becomes more and more popular in China.Whether and how does shares pledge affect corporate bond market is an important question,which deserves a further study.In this paper,I study the economic consequences of shares pledge of controlling shareholder on credit rating,the cost of newly issued corporate bonds,and the credit spread of corporate bond in second market.The structure of this paper is as follows.Firstly,I make a comprehensive and detailed review of related literature.While summarizing the research results of the predecessors,it also lays a solid foundation for my research.Secondly,illustrating the fundamental theories used in this research and then analyzing how does controlling shareholder's shares pledge influence corporate bond market.Thirdly,I draw lessons from the predecessors' literature and put forward the empirical regression model for the purposes of this paper.Lastly,I select the data of A-share listed companies from 2007 to 2015 to empirically test the relationship between the controlling shareholders' shares pledge and credit rating,the cost of new corporate bonds,and the credit spread of corporate bond in second market.And I give the detailed conclusions and policy suggestions in the end.In Chapter 1,I empirically test the relationship between the controlling shareholders'shares pledge and creidt rating.The empirical results are as follows.Firstly,the shares pledge of controlling shareholder indeed decreases the credit rating of new corporate bonds.As robustness tests,I take PSM,alternative proxies and other robustness tests and find the empirical results still exists.In addition,this paper examines the regulatory role of the region where the listed companies are located,bear market,and crash risk of stocks on the relationship between controlling shareholders' shares pledge and credit rating.Firms in low marketization regions are less likely to follow the market disciplines,and the local government is more likely to intervene when insiders with shares pledges default.Hence,insiders with shares pledges in low marketization regions are less likely to face the margin call threat.While in high marketization regions,when insiders with shares pledge default,lenders are more likely to protect their benefits through normal business rules,and the local government is less likely to intervene.Thus,insiders with shares pledges in high marketization face higher margin call threat and are more likely to lose their ownership and control of the firm.In bear market,most stock prices go down,hence,it's more likely to meet a margin call in bear market for controlling shareholders with shares pledge.If a firm experiences a crash,there will be a margin call on the insider with shares pledged.Thus,the margin call threat is higher when the crash risk of the firm is higher.As expected,I find that,only when firms who locate in the eastern region,in bear market,or face higher crash risk,the relationship between controlling shareholders' shares pledge and the cost of credit rating exists.In addition,managerial ability is stronger,the future performance of the firm is better.Transfer of the control of-the firm will casues executives with high managerial ability to leave,which may have a bad impact on the firm.As expected,I find that,only in group with lower managerial ability,the relationship above exists.Overall,the empirical results support the hypothesis of the risk of transfer of the control of the firm.I also take several tests to test the information quality hypothesis.To protect the control right of the firm,the controlling shareholder may direct the firm to manipulate information,real earnings management to boost stock price.Hence,information manipulation and real earnings management may be the mechanisms that shares pledge impact credit rating.Following Baron and Kenny(1986),I construct the indirect model and find that real earnings management and discretionary accrual are not the mechanisms.Besides,I also find that,higher the real earnings management is,higher the credit rating is,which indicates that,in China,credit rating agencies(CRA)can only recognize obviously risk factors,while they can not recognize recessive risk factors.Controlling shareholders may tunnel the listed company after they pledged their shares,thus resulting a higher credit spread,to exclude this potential mechanism,I divide the full sample into two groups based on tunneling,and I find that,whether in group with high tunneling,or in group with low tunneling,the relationship above both exists,thus excluding the tunneling hypothesis.In Chapter 2,I empirically test the relationship between controlling shareholders'shares pledge and the cost of new corporate bonds.The empirical results are as follows.Firstly,I find that the shares pledge of controlling shareholder indeed increases the cost of new corporate bonds.As robustness tests,I take 2SLS,PSM,alternative proxies and other robustness tests and find the empirical results still exist.In addtion,this paper examines the regulatory role of the region where the listed companies are located and crash risk on the relationship above.Firms in low marketization regions are less likely to follow the market disciplines,and the local government is more likely to intervene when insiders with shares pledges default or are faced with margin calls.Hence,insiders with shares pledges in low marketization regions are less likely to face the margin call threat.While in high marketization regions,when insiders with shares pledge default,lenders are more likely to protect their benefits through normal business rules,and the local government is less likely to intervene.Thus,insiders with shares pledges in high marketization region face high margin call threat and are more likely to lose their ownership and control of the firm.If a firm experiences a crash,there will be a margin call on shares pledges.Thus,the risk of transfer of control and ownership of firms with insiders pledged is higher when the firms are more likely to experience stock price crash.As expected,I find that,only when firms who locate in the eastern region or face higher crash risk,the relationship between controlling shareholders' shares pledge and the cost of newly issued corporate bond exists.In 2015,the Chinese A-share market crashed.Within an approximately three-month period(June 15 to September 25),the A-share index plummeted from 5,178 to 3,600 and the price of thousands of stocks crashed,resulting the insiders with shares pledge faced margin call threat.The drop was due to the Chinese government's crackdown on excess leverage in the stock market.During the crash period,the bond market was stable.Thus,the A-shares crash is an exogenous shock to the corporate bond market.I find that,in 2015,the relationship above is more significant.Overall,the empirical results support the hypothesis of the risk of transfer of the control of the firm.I also take several tests to exclude other explanations.To protect the control of the firm,the controlling shareholder may direct the firm to manipulate information,real earnings management,and tax avoidance to boost stock price.However,these opportunistic behaviors will worse the information environment of the firm,resulting in a higher credit spread.To exclude this possiility,I take analyst forecast accuracy and accounting comparability to measure information quality and divide the full sample into two groups based on information quality,and I find that information quality does not affect the relationship between shares pledge and the cost of new corporate bond.Besides,controlling shareholders may tunnel the listed company after they pledged their shares,thus resulting higher credit spread,to exclude this potential mechanism,I divide the full sample into two groups based on tunneling,and I find that,only in group with lower tunneling,the relationship above exists,while in group with higher tunneling,the relationship above does not exist,thus excluding the tunneling hypothesis.In Chapter 3,I empirically test the relationship between controlling shareholders'shares pledge and the creidt spread of bond in secondary market.The empirical results are as follows.Firstly,I find that the shares pledge of controlling shareholder indeed increases the credit spread of bonds in secondary market.As robustness tests,I take 2SLS,PSM,alternative proxies and other robustness tests and find the empirical results still exist.In addtion,this paper examines the regulatory role of state ownership equity(SOE),and bear market on the relationship between shares pledge and credit spread.To avoid the loss of state assets,the transfer of state assets need to undergo the approval of multi goverment branches.It may take a long time and is full of uncertainty.Besides,in China,the state companies are more likely to get bank loans from the bank,thus the state companies can add margin timely to avoid margin call.In bear market,most stocks price go down,hence,it's more likely to meet a margin call in bear market for controlling shareholders with shares pledged.As expected,I find that,only when firms who are non-SOE,in bear market,the relationship between controlling shareholders' shares pledge and credit spread exists.Taking 2015 A-shares Crash as exogenous shock,the empirical results also support the hypothesis of the risk of transfer of control right.I also take several tests to test other hypothesis.To protect the control right of the firm,the controlling shareholder may direct the firm to manipulate information,real earnings management to boost stock price.However,these opportunistic behaviors will worse the information environment of the firm,resulting in a higher credit spread.To exclude this potential hypothesis,I follow Baron and Kenny(1986)and build the indirect effect model.I find that discretionary accrual and real earnings management are not the mechanism that shares pledge impact credit spread,thus excluding the information quality hypothesis.Previous literature argues that controlling shareholders may tunnel the listed company after they pledged their shares,thus resulting higher credit spread,to exclude this potential mechanism,I divide the full sample into two groups based on tunneling,and I find that,only in group with lower tunneling,the relationship above exists,while in group with higher tunneling,the relationship above does not exist,thus excluding the tunneling hypothesis.This paper makes several contributions to the literature.Firstly,previous literature on shares pledge mainly focus on the company itself,such as earnings management,risk preference of management,stock repurchase,tax avoidance,and so on.My research provides the first study on the the impact of controlling shareholders' shares pledge of a firm on the corporate bond market.Thus,we add to the small but growing literature of an insider's shares pledge beyond its impact on an insider's opportunistic behavior and equity risk.Secondly,although many scholars study the influencing factors of credit spread of corporate bonds,there is little research on how the behavior of controlling shareholders affects the credit spread.As the controlling shareholder controls the appointment and dismissal of senior executives of listed companies and the decision of major production and operation,the controlling shareholder's behavior will inevitably have a significant impact on the listed company,thus affecting the credit spread.Based on the perspective of shares pledge,this paper studies the relationship between controlling shareholder's behavior and credit spread of corporate bonds,and enriches literature on controlling shareholder's behavior and credit spread.Thirdly,scholars study how does issuer-pay model,credit rating analysts' background characteristics,credit rating agency' s characteristics,corporate governance,information quality,and management ability impact credit rating.My study is the first to study the effect of controlling shareholder of issuers on credit rating,thus enlarging the reserach area of credit rating and enriching literature on credit rating.Fourthly,due to China's credit rating industry is very young and all aspects of it are still immature,there is a huge controversy about the rating effectiveness of credit rating agencies in China.This article examines whether the credit rating agencies can effectively reveal the possible risks involved in the controlling shareholders' shares pledge.I conclude that credit rating agencies in China have some certain risk identification ability,but their capabilities still need to be further improved.Therefore,my study enriches the literature on the effectiveness of credit rating agencies in China.Fifthly,CSEC requires firms,issuing corporate bond,disclose shares pledge information of controlling shareholders,indicating shares pledge of the insider maybe a risk factor of corporate bond market.My findings convince this worry and help regulators to have a comprehensive understanding of the impacts shares pledge of the insider on company.Hence,my study also has practical implications. |
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