Study On The Motivation And Economic Consequences Of Controlling Shareholders’ Equity Pledges

Equity pledging is a prevailing kind of right pledging that can efficiently meet financing needs without affecting the control of shareholders.However,the risk associated with it is also becoming increasingly apparent.In 2008,the continuous decline in share prices became a trigger for large-scale equity pledging defaults for the pledgors were unable to buy back the pledged equity in advance as agreed,which seriously damaged the interests of pledgees and exacerbated the systemic risk in the financial market.Then,the government introduced new regulations on equity pledging and implemented bailout programs.Though the above measures have worked,there are still many problems that need to be addressed.For example,the increased separation of control and cash flow rights,caused by controlling shareholders’ equity pledging,has made it easier to breed behavior against the interests of listed companies and has caused serious economic consequences.Based on the above background,this paper focuses on equity pledging of controlling shareholders,analyses the real motives of their pledges and the actions taken under the motives,and finally settles on the economic consequences for listed companies.Firstly,this paper sorts through relevant studies about equity pledges,and summarizes them in three aspects,namely the motives,the behavior of controlling shareholders and the economic consequences.It is found that playing a supportive role and appropriating are the two main motives for their equity pledges.And then,under different motives,controlling shareholders may made market value management or interest encroachment,thus causing positive or negative impacts on listed companies.Then,the concepts of controlling shareholders and equity pledges are defined and analysis has been made based on information asymmetry theory,principal-agent theory,control privity theory and signaling theory.Next,Guizhou Bailing is selected as the study object.On the basis of understanding the motivation of his equity pledge,the economic consequences of equity pledge to the company are analyzed and the following conclusions are obtained: First,the direct motivation of Guizhou Bailing’s controlling shareholder’s equity pledge is to meet personal financing needs,but the funds financed do not flow to the listed company,driving the reinforcement of encroachment motivation.Secondly,the equity pledge intensified agency problems.To obtain the personal benefit of control,the controlling shareholder implemented the appropriation of funds,illegal guarantee,abnormally high cash payout and asset transfer.Thirdly,the equity pledges triggered a negative market reaction,and tunneling caused by controlling shareholder increased Guizhou Bailing’s financing cost,inhibited R&D investment,reduced the company’s operating performance and value,and thus harmed the interests of other shareholders.Fourthly,Guizhou Bailing’s weak internal controls,lack of checks and balance in its power structure,inadequate information disclosure and limited external regulatory deterrence are the internal and external conditions that enable the encroachment pushed by equity pledging.Based on the conclusions,this paper proposes recommendations from different participants’ perspectives: Controlling shareholders should raise their awareness of risk;listed companies should strengthen checks and balances by adjusting their power structure,guarantee the independence of relevant personnel and improving internal control quality;the regulatory authorities should enhance the mandatory information disclosure and increase the punishment for opportunistic acts under equity pledging;small and medium shareholders should use various media channels to actively play a supervisory role.Main contributions of this paper are: First,this paper analyzes the motives,behavior and economic consequences of controlling shareholders’ equity pledges through the case study method,which is a practice and corroboration of the empirical research on a large sample.Second,this paper selects a typical case of Guizhou Bailing’s pledges for the study,and might enrich the relevant case studies of equity pledges and provide investors with ideas to identify encroachment motives and behaviors under equity pledges of controlling shareholders.