Analyzing The Economic Consequences Of Major Shareholders’ Share Pledging

Following the split-share structure reform and deregulation of share pledgees in China,share pledging has significantly expanded in the Chinese capital market,becoming a crucial avenue for firms and their major shareholders to secure liquid funds.This financing model is particularly favored by privately-owned enterprises constrained by limited financing channels and insufficient credit endorsements due to its efficiency,convenience,and low cost.Despite its advantages,the risks associated with share pledging are considerable,as evidenced during the 2018 stock market downturn when a high proportion of pledged shares triggered frequent risk incidents,exposing the shortcomings of this financing method and posing serious threats to the stability of the Chinese capital market.Excessive pledging by major shareholders not only heightened financial and operational pressures but also risked transferring control and jeopardized corporate survival during significant stock price declines.Although share pledging undeniably plays a positive role in alleviating corporate financial stress and fostering short-term business activities,its long-term economic consequences merit in-depth study.Particularly under China’s ambitious "Dual Carbon" goals,share pledging can lead firms and their major shareholders to excessively focus on short-term stock performance at the expense of essential long-term initiatives,such as investments in green technologies and ESG(Environmental,Social,and Governance)strategies.This myopic behavior not only jeopardizes the future growth potential of these enterprises but also risks damaging their reputation and reducing their market value.Therefore,this dissertation aims to investigate the economic consequence of major shareholders’ share pledging on listed firms,examining market-level and financial-level risks,and exploring how share pledging influences stock liquidity risk,left-tail risk,corporate green innovation,and ESG performance.The research seeks to provide insights into how major shareholders’ share pledging affects firms’ risk sensitivity in the current volatile market environment.The main research content and conclusions of this dissertation are as follows:Firstly,this dissertation reviews the institutional background and market status of share pledging and constructs a theoretical framework incorporating signaling theory,myopia theory,liquidity spiral effect,and liquidity spillover effect.This framework aims to explore how major shareholders’ share pledging under different market conditions influences corporate risk,providing a theoretical foundation for empirical analysis.Secondly,the empirical research initially focuses on the impact of major shareholders’ share pledging on stock liquidity risk.Based on data from the Shanghai and Shenzhen A-share markets from 2007 to 2020,the study finds a U-shaped relationship between share pledging ratios and stock liquidity risk.When the pledging ratio is low,it helps reduce liquidity risk;however,when the pledging ratio is high,liquidity risk significantly increases.This impact is particularly pronounced during market downturns,where firms with high pledging ratios face greater liquidity pressure and market panic,exacerbating liquidity risk.These findings reveal the nonlinear effect of major shareholders’ share pledging on stock liquidity risk and highlight the threat to market stability posed by high pledge ratios in extreme market conditions.Thirdly,based on the analysis of liquidity risk,this dissertation delves into the impact of major shareholders’ share pledging on corporate market risk in extreme market conditions.By manually collating price data from major shareholders’ share pledging before and after for listed firms from 2013 to 2022,an indicator reflecting the pressure of share pledging is constructed,revealing that in severe market downturns,major shareholders’ share pledging pressure significantly increases the left-tail risk of stocks.This risk is more pronounced in regions with lower marketization and trust levels,illustrating how share pledging in unstable markets can exacerbate corporate risk and provide a basis for effective risk management policies.Lastly,this dissertation also explores how the pressure from share pledging affects firms’ green innovation and ESG performance.We find that facing market pressures associated with share pledging,firms may prioritize short-term financial stability over long-term investments,impacting their sustainable development and performance in ESG evaluations.By analyzing the relationship between share pledging pressure and firms’ long-term developmental goals,this dissertation provides new insights into how major shareholders’ share pledging affects firms’ strategic decisions in response to market pressures,supporting the promotion of firms’ long-term value growth.In summary,this dissertation not only provides new empirical insights into the relationships between share pledging,liquidity risk,and left-tail risk but also provides guidance on managing risks associated with share pledging.Furthermore,it reveals how share pledging pressures can affect firms’ long-term investment decisions and managerial short-sightedness,adversely influencing environmentally friendly innovation activities and overall ESG performance.This research contributes significant theoretical and practical insights into share pledging’s dual impact on corporate behavior and market dynamics.The main innovations and contributions of this dissertation are as follows:(1)Theoretical Framework Construction: This dissertation innovatively introduces a groundbreaking theoretical framework that integrates various dimensions,including disparities in market environments and patterns of risk.This framework lays a robust theoretical foundation for a detailed understanding of the intricate effects of share pledging on corporate dynamics.It elaborates on how share pledging acts as a market signal,influencing both market and financial risks faced by corporations,and notably intensifies liquidity crises and the risks of severe market downturns.This theoretical model not only underpins the empirical analysis conducted in this study but also provides valuable insights for developing regulatory policies and enhancing corporate risk management strategies.(2)New Measurement of Share Pledging Pressure: A significant innovation of this dissertation is the development of a new comprehensive indicator that measures share pledging pressure.Unlike traditional studies that often focus on the quantity and stock of pledges,this dissertation introduces a new comprehensive indicator that considers both stock price changes before and after pledging and the scale of pledging,allowing for a more accurate assessment of whether major shareholders face margin call pressures and the extent of these pressures.The application of this method not only enhances the precision of the research but also reflects the actual market pressures faced by firms,further analyzing how share pledging affects corporate financial decisions and risk.This innovative measurement tool opens up new perspectives for understanding the economic consequences of share pledging,which is of great practical significance for corporate managers,regulators,and investors in formulating more effective risk management and decision-making strategies.(3)Share Pledging and Corporate Risk: By empirically studying the relationships between share pledging,liquidity risk,and left-tail risk,this dissertation extends existing risk assessment models.It provides specific guidance for market participants on managing risks associated with share pledging,providing a detailed view of how pledging influences corporate risk under various market conditions.(4)Share Pledging and Corporate Sustainable Practices: This dissertation examines the impact of major shareholders’ share pledging pressure on corporate green innovation and ESG(Environmental,Social,and Governance)performance,with a particular focus on China’s robust "Dual Carbon" objectives.The study illustrates how market-induced pressures can lead to firms’ myopic decision-making,consequently curtailing investments in eco-friendly innovations and undermining overall ESG performance.The analysis critically assesses the adverse effects of share pledging pressure on sustainable corporate development through shortsighted management actions,providing crucial insights for policymakers and business leaders on crafting strategies to foster green innovation and enhance ESG performance amid financial and market constraints.Furthermore,this research enriches the discourse on the economic implications of share pledging and provides empirical evidence to guide the development of pertinent regulatory frameworks,thereby supporting firms in achieving economic gains while adhering to their environmental and social obligations.