A Study On The Motivation And Effect Of Share Repurchase Under The Share Pledge Of Controlling Shareholders

Due to the advantages of controlling shareholders’ equity pledge financing,such as adjustable financing scale,fast fund-raising speed,and flexible repayment terms,without affecting their control rights,equity pledge has been favored by more and more controlling shareholders of listed companies.However,the disadvantage of equity pledge is also obvious.Once the company’s stock price drops significantly to the pledge closing line,major shareholders need to provide sufficient margin or further increase the proportion of equity pledge to mitigate the closing risk,otherwise the pledgee will have the right to forcibly close the position.Under the pressure of equity pledge to close positions,listed companies often adopt methods such as share buybacks,large shareholder increases,and equity incentives to increase their stock prices.Share repurchase is the act of a company buying back its issued or outstanding shares.Share repurchase can increase the value of a company by reducing the number of shares outstanding,and send a signal to the market that the company’s stock price is undervalued.Due to the fact that share buybacks can increase the company’s stock price,listed companies will apply them to mitigate the company’s equity pledge risk.In addition,the ownership structure of many listed companies in China is characterized by "one share dominating",and the absolute control position of controlling shareholders provides convenience for them to manipulate listed companies to repurchase shares to mitigate their own equity pledge risks.Controlling shareholders use information asymmetry to manipulate the company’s stock price,and "flickering" share buybacks harm the interests of small and medium-sized investors.At the same time,controlling shareholders alleviate the opportunistic motivation of equity pledge driven share repurchase behavior,which in essence transfers their own risks to listed companies,and in the long run,it will also damage corporate value.Since the "Company Law" in 2018 relaxed the restrictions on share repurchase,the number of listed companies conducting share repurchase has significantly increased.However,behind the share repurchase events in listed companies,whether the company is indeed developing well and transmitting signals to the market or there are other opportunistic factors that are worth investigating.In order to help investors better analyze the real motivation of corporate share repurchase in the context of controlling shareholder equity pledge,this article takes Wanfeng Aowei as the case object and comprehensively analyzes the real motivation of share repurchase of the case company from three perspectives: equity pledge action events,financial situation,and stock price.The first is to analyze whether a company has equity pledge liquidation risk during share repurchase from the perspective of equity pledge action events.The higher the liquidation risk,the higher the possibility that controlling shareholders can use share repurchase to enhance stock prices to alleviate equity pledge.Secondly,it analyzes whether the company has sufficient free cash flow to implement share repurchase from the perspective of financial situation,and briefly analyzes the solvency indicators and profitability indicators to evaluate whether the company’s development is good.Finally,from the perspective of stock prices,using the P/E ratio method and Tobin q value to analyze whether the company’s stock price is undervalued.This study found that: Wanfeng Aowei claims that the continuous share repurchase behavior is to convey to the market that the stock price is undervalued,and the signal transmission motivation for the company’s good development is not convincing.The motivation for its controlling shareholders to manipulate listed companies to repurchase shares in order to avoid the risk of equity pledge liquidation is more explanatory.In addition,this article also analyzes the short-term market effects and long-term financial effects of the stock repurchase of Wanfeng Orwell.The research results indicate that the stock repurchase can bring short-term positive market effects,but with the continuous stock repurchase of Wanfeng Orwell,the duration of this positive effect is also shortening,indicating that the market has gradually recognized the opportunistic motivation of the stock repurchase of Wanfeng Orwell and given a negative effect.The financial effect of the share buyback of Wanfeng Aowei has not shown a positive trend,indicating that the share buyback behavior of Wanfeng Aowei cannot improve the financial situation of the enterprise.At the same time,it has also verified that the statement that Wanfeng Aowei conducts share buyback to convey a signal of good development of the company to the market is untenable.Based on the analysis of the case of Wanfeng Aowei,on the one hand,it provides reference value for listed companies with similar controlling shareholders with equity pledge risks.Companies should standardize their internal supervision mechanism to prevent opportunistic behavior of controlling shareholders.At the same time,it is hoped that China’s share repurchase policy can be improved,and some constraints on share repurchase can be established to reduce the number of opportunistic motivation driven flicker type share repurchase events;On the other hand,it provides a reference for investors to identify the real motivation of share repurchase under the background of controlling shareholder equity pledge,helping small and medium-sized investors to make more rational stock investment and reduce investment risks.