A Study On The Impact Of Pledge Ratio On The Risk Of Default Of Controlling Shareholders’ Equity Pledge

After its emergence in China,the new financing method of equity pledge has been popular among shareholders of listed companies and various financial institutions because of its simplicity,efficiency,and speed.Among them,the controlling shareholders of listed companies are particularly interested in this financing method because it can achieve efficient financing without changing the original shareholding structure of the listed companies.However,at the same time,the risks of equity pledging have gradually come into view and attracted widespread attention,among which the ability to control shareholders to repay the loan on maturity and the price fluctuation of pledged stocks are the main risk points of equity pledging business.However,at the same time,the risks associated with equity pledges have also come into view and attracted widespread attention,with the controlling shareholder’s ability to repay on maturity and the price fluctuations of the pledged stocks being the main risk points in the equity pledge business.When the controlling shareholder does not have sufficient solvency at the time of loan maturity,or the price of the pledged shares reaches the closing line during the life of the equity pledge and the controlling shareholder cannot add equity or replenish the margin on time,the pledged shares are likely to be forcibly closed out or auctioned following the law.Therefore,in order to avoid risks arising from the pledgee’s lack of solvency or the volatility of the pledged stock price,in practice,pledgees often seek a balance between controlling risks and pursuing returns by setting the pledge ratio.In view of this,this paper studies the intrinsic link between pledge ratio and controlling shareholder default risk under the perspective of stock pledge price volatility,which not only provides a reference direction for pledgees on how to prevent default risk of equity pledges by controlling shareholders of listed companies,but also provides development ideas on how to build a healthy and stable equity pledge market.Based on the above analysis,this paper constructs a pledge rate decision model that considers the pledgee’s expected return and risks tolerance level from the pledgee’s viewpoint based on the risk scenario matrix and pledged stock price volatility,and then explores the impact of pledge rate on the controlling shareholder’s default risk and conducts the corresponding simulation analysis.Further,this paper selects listed companies with controlling shareholders’equity pledges in 2021 as the research target and uses VaR and KMV methods to calculate listed companies’ equity pledge ratio and the risk of default of holding shareholders,respectively.The corresponding regression functions are constructed after considering the possible effects of the listed companies’ gearing ratio,equity nature,and corporate performance.After considering the possible effects of listed companies’ gearing ratio,nature of equity,and corporate performance,the corresponding regression functions are constructed.And based on this,an empirical test is conducted with the help of Stata to explore which relationship exists between pledged stock price volatility,pledge ratio,and controlling shareholders’ equity pledge default risk.By combining the results of the simulation analysis and the empirical tests,the paper obtains the following conclusions:(1)When the moral hazard of the pledgee is excluded,the pledgee may default when and only when the value of the pledged stock is impaired.(2)The relationship between the pledgee’s expected return and the pledge ratio is inverted U-shaped,and there is an optimal pledge ratio to maximize the pledgee’s expected return.(3)The optimal pledge ratio for the pledgee is related to the pledgee’s risk tolerance.When the risk borne by the pledgee is within the pledgee’s risk tolerance,the pledge ratio that maximizes the pledgee’s expected return is the optimal pledge ratio;conversely,when the risk borne by the pledgee exceeds the pledgee’s risk tolerance,the pledge ratio obtained based on the pledgee’s lower risk tolerance level is the optimal pledge ratio.(4)The pledgee’s risk of default depends on whether the value of the pledged equity is impaired and whether the pledgee suffers losses above its risk tolerance.The pledgee’s default risk was positively correlated with the pledge ratio and the price volatility of the pledged stocks.(5)The results of the analysis based on the empirical part of the multiple regression model show that,after controlling for factors that may have an impact on the experimental results,stock price volatility of pledged stocks is positively related to the risk of default by controlling shareholders,while the pledge ratio has a U-shaped relationship with the risk of default by controlling shareholders;the level of stock price volatility has an impact on the relationship between the pledge ratio and the risk of default by controlling shareholders,after controlling for factors that may have an impact on the experimental results.It also found that the above phenomenon is more significant in companies with smaller sizes,non-state ownership nature,higher gearing ratios,and lower performance levels.