Controlling Shareholder’s Equity Pledge,Over-investment And Financial Distress

In recent years,equity pledge has become a preferred financing method for controlling shareholders of listed companies.In 2017,a total of 1,571 listed companies issued an announcement on new equity pledges by controlling shareholders or actual controllers,accounting for more than 40% of the total number of A-share listed companies.Among them,the proportion of equity pledge of some large shareholders is quite high,and even almost all the shares held are fully pledged.However,since 2015,affected by the macroeconomic situation,share prices have fallen and listed companies also frequently burst the risk of bursting positions,cases of companies’ over investment and financial distress while controlling shareholders pledge their equity also emerged.Therefore,this paper selects Jiangyin Zhongnan Co.,Ltd as a case to study the impact mechanism of the controlling shareholder’s equity pledge inducing over-investment and financial distress in the company.The study found that:(1)the controlling shareholder’s share pledge is not naturally motivated for tunneling,but more out of the need to ease financial constraints.Whether its equity pledge will obtain private gains by encroaching on the interests of listed companies,depends on the comparison of tunneling benefits and tunneling costs.A high percentage of equity pledges increases the separation of cash flow rights and control rights,weakens the incentive effect of cash flow rights,greatly reduces the cost of tunneling and increases the moral hazard of controlling shareholders.(2)Equity pledges by controlling shareholders may affect companies’ investment decisions through two paths,which are short-term performance enhancement due to market capitalization management motive and gain private benefits via control,causing the company to misjudge the return of investment projects and leading to the problem of overinvestment.(3)While controlling shareholders’ equity pledge induces over-investment,it can also bring financial risks to the company.On one hand,the risk of poor operation after the equity pledge can be seen as partly transferred to the pledgee,on the other hand,under the market capitalization management motive,in order to send a good signal of the quality,the company maybe more likely to choose to carry out short-term debt financing,and therefore putting the company in financial distress.The main innovation of this paper is that it has identified the impact mechanism of controlling shareholders’ equity pledges,over-investment and financial distress,which enriches the study of the economic consequences of controlling shareholders’ equity pledges,and suggests that controlling shareholders’ equity pledges do not naturally have a tunneling motive,and decisions are depend on the comparison of tunneling costs and tunneling benefits.The conclusion of this paper has enlightenment significance for better supervision of the controlling shareholder’s equity pledge.