Study On The Economic Consequences Of Controlling Shareholders' Equity Pledge

In recent years,equity pledge,as an important financial innovation tool,has been rapidly developed and widely used in China's capital market.It not only eases the financing constraints of major shareholders,but also widens the financing channels of enterprises.Furthermore,it has increasingly become an import supplement to bank credit financing which promotes the development of entity economy.However,since 2015,China's A-stock market enters a downcycle,and a large number of stock prices have fallen off.It is worth noting that most of the value of the pledged shares triggered the maintenance margin.Therefore,forced liquidation of controlling shareholders'pledge shares and the transfer of the actual controller of the listed company occurred frequently,which has aroused widespread concern.The reason is that equity pledge is also a kind of pledge loan with the risk of stock price fluctuation.The value of pledged shares fluctuates according to the change of stock price.When the value of pledged shares is not enough to provide guarantee for its financing amount,the pledgee has the right to require the pledgor to increase the security deposit or redeem the shares.When the pledgor is unable to fulfill the relevant agreement,the pledgee will compulsorily liquidate the pledged shares and recover funds.In addition,the essence of equity pledge is a kind of right pledge,which means that the pledgor pledges the ownership of the shares to the pledgee,but retains other rights related to the shares held,such as voting rights.Therefore,equity pledge not only intensifies the separation of cash flow right and control right of controlling shareholders,but also increases the risk of control right transfer of controlling shareholders.After equity pledge,controlling shareholders will change the decision-making of listed companies for different motives,and lead to different economic consequences.Based on the above logic,this paper,based on the status quo of equity pledge in China,is committed to exploring the economic consequences of controlling shareholders' equity pledge at the enterprise level and market level.Considering that investment decision-making and investment efficiency are not only the premise of value creation and realization,but also the important guarantee of economic transforming,upgrading,and realizing high-quality growth,and stock liquidity not only improve the efficiency of capital market,but also provide guarantee for the stable operation of macro-economy,this paper systematically discusses the corporate investment effect and capital market effect of equity pledge of controlling shareholders.Taking A-share non-financial listed companies in Shanghai and Shenzhen as the research sample,this paper analyzes the impact of controlling shareholders' equity pledge on the company's investment behavior,investment efficiency and stock liquidity,and finally obtains a number of valuable empirical research findings as follows.Firstly,the equity pledge ratio by controlling shareholder is in a U-shape relationship with the financial investment level of listed companies,and an inverted Ushaped relationship with their real investment level.When the ratio of equity pledge by controlling shareholder is lower than a critical value,the interest between the controlling shareholder and minority shareholders is more consistent,and the transfer of control right is less risky.Therefore,the controlling shareholder will participate in the core business operation of the firm and increase real investment actively.When the ratio of equity pledge by controlling shareholder is higher than a critical value,though the conflict of interest between controlling shareholder and minority shareholders aggravate the motivation of tunneling by controlling shareholder,the risk of control right transfer is more prominent.Therefore,controlling shareholder has a stronger incentive to maintain the share price and increase financial investment.The further study shows that private companies,companies with high risk of control transfer,and companies with large difference in return between financial assets and operating assets are more motivated to change and adjust the investment behavior of listed companies after the equity pledge of controlling shareholders.Secondly,the equity pledge by controlling shareholder is not conducive to the firm to grasp investment opportunities,and inhibits the firm's sensitivity of investment scale to investment opportunity;controlling shareholder's equity pledge not only exacerbates the company's overinvestment,especially in non-value projects,but also worsens the company's underinvestment,especially in valued investment projects;for companies with better investment opportunities,controlling shareholder's equity pledge does not significantly impact on the value of growth options,while for companies with poor investment opportunities,controlling shareholder's equity pledge does significantly negatively impact on the value of liquidation options.Further studies results show that corporate investment decisions with financing constraints,located at low degree of marketization and during the period of tight monetary policy are more vulnerable to the equity pledge by controlling shareholders,presenting a lower investment scale to investment opportunity sensitivity.The mechanism research finds that after the controlling shareholder's equity pledge,the listed company not only reduces information disclosure quality and increases the probability of information disclosure violation which is called information asymmetry channel,but also increases to tunnel more money,increases the scale of related transactions and enhances the probability of M&A with higher acquisition premium which is called agency conflict channel.Thirdly,the equity pledge by controlling shareholders lead to the increase of transaction cost and the decrease of stock liquidity of listed companies.After the pledge of controlling shareholder's equity,the aggravation of agency problem and the increase of the degree of information asymmetry between the internal and external investors of listed companies caused by the maintenance of market value to prevent the transfer of control rights,which eventually leads to the change of stock trading behavior,the increase of transaction cost and the decrease of stock liquidity of listed company.Further research shows that better governance supervision(e.g.,companies with low equity concentration,high equity balance and informed institutional investors'shareholding)and less risk of control transfer(e.g.,state-owned companies,companies located in the areas with low marketization degree and with lower alert margin risk)can help to restrain the negative effect of controlling shareholder's equity pledge on stock liquidity of listed company.Compared with the existing literature,the possible innovations and contributions of this study are in the following four aspects:First of all,this paper unifies the motivation of "support" and "prevention of control right transfer" into the same research framework for the first time,and explores that whether the controlling shareholders with equity pledge adjust the investment behavior of listed companies according to the different motivations.The existing literature has not fully considered the impact of equity pledge ratio on the heterogeneity of investment preference of listed companies.This paper uses the equity pledge ratio to imply the difference of interest relationship and control right transfer risk between controlling shareholders and minority shareholders after pledge.It is empirically tested that the controlling shareholders with low pledge ratio are more likely to support the development of listed companies,while the controlling shareholders with high pledge ratio are more likely to damage the long-term development of listed companies in order to prevent the transfer of control rights,which reveal that the high proportion of the controlling shareholders' pledge has a greater negative impact on the production and operation of listed companies.The main research findings of this paper fill in the relevant research gaps.Secondly,based on the economic law of capital chasing profit,this paper firstly puts the controlling shareholder's equity pledge into the research framework of"investment decision-making,investment efficiency,and value creation",and deeply analyzes the "black box" that the controlling shareholder's equity pledge affects the enterprise's value from the perspectives of investment flexibility and inefficiency investment.Although there are some studies about the stock price maintenance by overinvestment after the controlling shareholder's equity pledge,the impact on the investment efficiency is too one-sided.The main research findings of this paper are the supplement and expansion of the existing research conclusions,and a more comprehensive and detailed answer to the mechanism of the impact of controlling shareholders' equity pledge on enterprise investment efficiency and enterprise option value.Thirdly,From the perspective of stock liquidity,this paper discusses for the first time the impact of controlling shareholder's equity pledge on the transaction behavior and transaction cost of uninformed traders(liquidity providers).The extant literature on the capital market effect of controlling shareholders' equity pledge mostly focuses on the impact on the risk of stock price collapse,and has not yet deeply discussed on the stock liquidity related to the efficiency of capital market.The research findings not only expand the research on the cross field of individual financial behavior of controlling shareholders and financial market microstructure,but also enrich the capital market effect of equity pledge of controlling shareholders and make up for the existing research gaps.Finally,the conclusions of this study have important practical significance and policy implications.The conclusion shows that with the increase of the proportion of controlling shareholders' equity pledge,the motivation to prevent the transfer of control rights is more serious.From the overall perspective,equity pledge not only reduces the investment flexibility but also increases the inefficient investment,which significantly inhibits the liquidation option value of companies with poor investment opportunities.However,the aggravation of agency problem and self-interest motivation after the pledge of controlling shareholders' equity worsens the information asymmetry level of listed companies,so as to improve the transaction cost of stocks and reduce the liquidity of stocks.The conclusion of the study not only is helpftul to understand the economic consequences of controlling shareholder's equity pledge in the two aspects of company investment effect and capital market effect,but also has a certain guiding significance for investors' investment and stock trading,has an important reference value for the corporate governance and decision-making of listed companies,and provides theoretical basis and empirical evidence for the regulatory authorities to reasonably regulate the equity pledge behavior and further improve the efficiency of resource allocation in the capital market.