Insiders' Share Pledging And Stock Price Crash Risk

This study examines the impact of insiders' share pledges and stock price crash risk.Using a sample of public firms listed on the Shanghai and Shenzhen stock exchanges,I find a positive relation between past share pledges and current crash risk.This finding is consistent with the view that,controlling shareholders who engage in share pledges hoard bad news in other to minimize margin call pressure caused by decline in the stock's price.I further find evidence that share pledges increases stock illiquidity which necessitate the need to hoard bad news.Further analysis shows that the positive association is more pronounced for firms with lower level of institutional investors and firms with lower levels of analyst coverage.This supports the idea that controlling shareholders who pledge shares in firms with weaker external monitoring mechanism are more likely to conceal bad news thereby increasing the crash risk.The results obtained are robust after accounting for potential endogeneity and alternative measure of crash risk.