A Study On The Determinants And Economic Consequences Of Controlling Shareholders' Stock Pledge In China

With the rapid development of stock pledge in the Chinese capital market,it has raised great attention in the public.Stock pledge generally refers to the behavior of pledgers(capital demand side,debtor,shareholders)who are willing to pledge some of their stocks in listed or non-listed firms to the pledgees(such as banks,security firms and investment firms,or trust firms)when applying for a loan,or making a mortgage guarantee for a third party's loan.Compared with other underlying asset(such as fixed asset),stocks are more liquid and can be more easily realized,while stock pledge will not result in ownership dilution,thus stock pledge are favored by shareholders and financial institutions since it can not only solve the enterprise's financing difficulty but also develop financial institution's businesses.Based on China's specific institutional background,this study adopts a sample of non-financial Chinese listed firms on the A-share market from 2004 to 2015 to investigate both the determinants and economic consequences(economic consequences include both behavioral consequences and market consequences,the former consists of management earnings forecast,earnings management and accounting conservatism,while the latter mainly refers to stock price crash risk)of controlling shareholders' stock pledge.Specifically,we study the effects of some corporate factors on controlling shareholders' stock pledge motivation,and further explores the effect of controlling shareholders' stock pledge on management earnings forecast,earnings management,accounting conservatism,as well as stock price crash risk.This study can be divided into eight parts as follows:Chapter one introduces the background,motivation,research questions,framework,content arrangement,innovations and contributions of this research.Chapter two makes a brief introduction to stock pledge and literature review.It introduces some basic concepts,legal regulations,domestic and overseas market conditions of stock pledge,and makes a brief literature review.Chapter three investigates the effect of financing constraint,asset collateral value and credit ranking on controlling shareholders' stock pledge decisions and scale via Logit,OLS and Tobit models after considering internal and external corporate governance as well as external environment factors.Chapter four studies the effect of controlling shareholders' stock pledge on management earnings forecast strategies,and mainly investigates the news' type,biases,voluntary and timely properties of management forecast strategies in the pre-pledge period,and further examins management forecast strategies characteristics during the in-pledge and post-pledge period.Chapter five studies the effect of controlling shareholders' stock pledge on earnings management,and mainly examines the existence,approaches(accrual or real earnings management)and characteristics(direction and extent)of earnings management during the pre-pledge period,and further investigates earnings management behaviors during the in-pledge and post-pledge period.Chapter six analyzes the influence of controlling shareholders' stock pledge on accounting conservatism in a continuous and dynamic view.Using CScore and Basu models to measure accounting conservatism,we conduct a dynamic analysis on accounting conservatism during the pre-pledge,in-pledge and post-pledge periods from the view point of both cross-sectional and time-series.Chapter seven studies the relationship between controlling shareholders' stock pledge and firms' stock price crash risk,as well as the mediating effects of management earnings forecast quality,earnings management and accounting conservatism between controlling shareholders' stock pledge and in-pledge as well as post-pledge stock price crash risk.Chapter eight summarizes the conclusions and points out the limitations of this study as well as future research directions.Our empirical research brings about the following main conclusions:(i)Financing constraint,asset collateral ability and credit ranking are important factors in motivating controlling shareholders' stock pledge decisions;(ii)Managers of pledged firms have strong incentives to issue good news and positive biases in their earnings forecasts,so as to help controlling shareholders to gain the stock pledge right and get more funding with inflated stock price in the pre-pledge period;(iii)Managers do have coordinated with controlling shareholders in conducting both opportunistic accrual and real earnings management in the pre-pledge period,and the more controlling shareholders will pledge their shares,the higher extent both the accrual and real earnings management;(iv)Controlling shareholders' stock pledge can make a significant influence on firms' accounting conservatism in a continuous dynamic process,namely,compared with firms whose controlling shareholders are not pledged,pledged firms has a lower level of accounting conservatism in the pre-pledge and in-pledge period,but a similar level of accounting conservatism in the post-pledge period,meanwile,from the perspective of time series analysis,pre-pledge and in-pledge conservatism is lower than non-pledge period,while in-pledge conservatism is similar to that of pre-pledge,and post-pledge conservatism is significantly higher than that of in-pledge;(v)Finally,controlling shareholders' stock pledge can significantly influence stock price crash risk,namely,compared with firms whose controlling shareholders are not pledged,pledged firms have lower stock price crash risk in the in-pledge period,but will experience an increase in stock price crash risk,resulting higher crash risk in the post-pledged period.This "low crash risk during the in-pledge period,high crash risk afterwards" situation further manifests that managers of the pledged firms do have make such "delaying tactics" as strategic positively biased earnings forecasts and positive earnings management to reduce the stock price volatility when controlling shareholders are in pledge,and to postpone the coming of stock price crashes until controlling shareholders finally terminate their pledge.Management earnings forecast,earnings management and accounting conservatism are all important areas and topics in accounting research.Management earnings forecast belongs to off-the-statement information disclosure,while earnings management and accounting conservatism belong to on-the-statement information disclosure.There are differences and relationships between earnings management and accounting conservatism,the fundamental difference is that earnings management is a purposed earnings manipulation activity,while accounting conservatism is an endogenous financial reporting system of accounting regimes(Mao and Dai,2009),meanwhile,their relationship can be shown that accounting conservatism can limit earnings management by increasing managers' manipulation costs,whereas the asymmetric recognition principle of gains and losses(more timely and fully recognizing "bad news" as "losses")in accounting conservatism can provide managers great convenience to under estimate earnings(especially "big bath").Different from the existing literature,this study has some improvements and innovations as follows:Firstly,management earnings forecast is one of the most important corporate information disclosure channels.Thus,controlling shareholders and managers may collude in opportunistic forecasts,so as to gain some private benefits by manipulating stock prices via forecasts.This study firstly provides evidence for ex ante management earnings forecast strategies that origin from controlling shareholders'stock pledge in the Chinese setting.Secondly,earnings management has been wildly adopted by the managers in masking corporate operational performance,while there is no research investigating the ex ante earnings management behavior of pledged firms,we extend the research perspective from the point view of "ex post" to the point view of "ex ante",so as to improve our understanding of earnings management behavior and fill in the research gap of existing literature.Thirdly,until now,there is no paper systematically explores the relationship between controlling shareholders' stock pledge and accounting conservatism.This study tests the dynamic effect of controlling shareholders' stock pledge on accounting conservatism based on data from Chinese listed companies on the A-share market,it can not only supplement the existing literature,but also complement and enrich the theoretical framework of accounting conservatism.Finally,existing literature has studied the relationship between controlling shareholders' stock pledge and stock price crash risk(Xie et al,2016),but has not examined the mechanisms between them,thus,this study can be a beneficial supplement to the current research.This study has both theoretical and practical significances.Theoretically,it enhances our understanding of agency theory,theories of insiders's(controlling shareholders and managers)motivation and behavior,information disclosure theory.Practically,it offers policy reference in how to regulate shareholders' stock pledge so as to reduce relevant risk,and in how to protect the interests of pledgees and minority shareholders so as to ensure the stability of financial market and the real economy.