Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market

Hongmei Xu

doi:doi:10.11648/j.jfa.20210903.15

| Peer-Reviewed

Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market

Hongmei Xu

Published in Journal of Finance and Accounting (Volume 9, Issue 3)

Received: 29 March 2021 Accepted: 17 May 2021 Published: 21 June 2021

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

In this paper, we assess the economic impact of share pledging by focusing on corporate debt default risk, the most disruptive events in the life of a corporation. Using Instrumental Variables and a regulatory change that increasing the possibility of share pledging as a quasi-exogenous shock, we establish that increased share pledging decreases corporate default risk. The baseline results are robust by eliminating the effect of financial crises, adding other control variables, constructing new PSM samples and use other proxies for default risk. Further tests show that the relation is attenuated in higher ownership concentration and lower ex-ante institutional ownership firms. Our results indicate that share pledging can be beneficial to shareholders and important stakeholders like creditors by reducing the likelihood of corporate default. Our paper throws additional light on the economic impact of share pledging. Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market, our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with prior literature which shows that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms’ exposure to downside risk associated, share pledging can play a more positive role in our setting.

Published in	Journal of Finance and Accounting (Volume 9, Issue 3)
DOI	10.11648/j.jfa.20210903.15
Page(s)	93-100
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Share Pledging, Default Risk, Ownership Concentration, Institutional Ownership

References

[1]	Altman E I. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy [J]. Journal of Finance, 1968, 23 (4): 589-609.
[2]	Berger A N, Udell, G F. Collateral loan quality and bank risk [J]. Journal of Monetary Economics, 1990, 25 (1): 21-42.
[3]	Bharath S, Shumway T. Forecasting default with the Merton distance to default model [J]. Review of Financial Studies, 2008, 21 (3): 1339-1369.
[4]	Brogaard J, Li D, Xia Y. Stock liquidity and default risk [J]. Journal of Financial Economics, 2017, 124 (3): 486-502.
[5]	Chan K, Chen H, Hu S, et al. Share pledges and margin call pressure [J]. Journal of Corporate Finance, 2018, 52: 96-117.
[6]	Chava S, Purnanandam A. Is default risk negatively related to stock returns? [J]. Review of Financial Studies, 2010, 23 (6): 2523-2559.
[7]	Dou Y, Masulis R W, Zein J. Shareholder wealth consequences of insider pledging of company stock as collateral for personal loans [J]. Review of Financial Studies, 2019, forthcoming.
[8]	Faccio M, Marchica M, Mura R. Large shareholder diversification and corporate risk-taking [J]. Review of Financial Studies, 2011, 24 (11): 3601-3641.
[9]	Garlappi L, Shu T, Yan H. Default risk, shareholder advantage, and stock returns [J]. Review of Financial Studies, 2006, 21 (6): 2743-2778.
[10]	Guedhami O, and Pittman J. The importance of IRS monitoring to debt pricing in private firms [J]. Journal of Financial Economics, 2008, 90 (1): 38-58.
[11]	Hovakimian A, Kayhan A, Titman S. Are corporate default probabilities consistent with the static trade-off theory? [J]. Review of Financial Studies, 2012, 25 (2): 315-340.
[12]	Huang Y, Miao J, Wang P. Saving china's stock market [J]. 2016, working paper.
[13]	Law D, Roache S K. Assessing default risks for Chinese firms: A lost cause? [M]. International Monetary Fund, 2015.
[14]	Li M, Liu C, Scott T. Share pledges and firm value. Pacific-Basin Finance Journal, 2019, forthcoming.
[15]	Liu L, Luo D, Han L. Default risk, state ownership and the cross-section of stock returns: evidence from China [J]. Review of Quantitative Finance and Accounting, 2018: 1-34.
[16]	Meng Q, Ni X, Zhang J. Share pledging and corporate risk-taking: Insights from the Chinese stock market [J]. 2019, working paper.
[17]	Merton R. On the pricing of corporate debt: The risk structure of interest rates [J]. Journal of Finance, 1974, 29 (2): 449-470.
[18]	Ni X, Zhu W. Short-sales and stock price crash risk: Evidence from an emerging market [J]. Economics Letters, 2016, 144: 22-24.
[19]	Rajan R, Winton A. Covenants and collateral as incentives to monitor [J]. Journal of Finance, 1995, 50 (4): 1113-1146.
[20]	Rosenbaum P, Rubin D. The central role of the propensity score in observational studies for causal effects [J]. Biometrika, 1983, 70 (1): 41-55.
[21]	Serfling M. Firing costs and capital structure decisions [J]. The Journal of Finance, 2016, 71 (5): 2239-2286.
[22]	Vassalou M, Xing Y. Default risk in equity returns [J]. Journal of Finance, 2004, 59 (2): 831-868.
[23]	Wang Y, Chou R. The impact of share pledging regulations on stock trading and firm valuation [J]. Journal of Banking & Finance, 2018, 89: 1-13.
[24]	Zhang, W., G. Han, and S. Chan. How Strong are the Linkages between Real Estate and Other Sectors in China? [J] HKIMR Working Paper, 2014, 11.

Cite This Article

Plain Text BibTeX RIS

APA Style

Hongmei Xu. (2021). Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. Journal of Finance and Accounting, 9(3), 93-100. https://doi.org/10.11648/j.jfa.20210903.15

Copy | Download

ACS Style

Hongmei Xu. Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. J. Finance Account. 2021, 9(3), 93-100. doi: 10.11648/j.jfa.20210903.15

Copy | Download

AMA Style

Hongmei Xu. Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. J Finance Account. 2021;9(3):93-100. doi: 10.11648/j.jfa.20210903.15

Copy | Download

@article{10.11648/j.jfa.20210903.15,
  author = {Hongmei Xu},
  title = {Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {3},
  pages = {93-100},
  doi = {10.11648/j.jfa.20210903.15},
  url = {https://doi.org/10.11648/j.jfa.20210903.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210903.15},
  abstract = {In this paper, we assess the economic impact of share pledging by focusing on corporate debt default risk, the most disruptive events in the life of a corporation. Using Instrumental Variables and a regulatory change that increasing the possibility of share pledging as a quasi-exogenous shock, we establish that increased share pledging decreases corporate default risk. The baseline results are robust by eliminating the effect of financial crises, adding other control variables, constructing new PSM samples and use other proxies for default risk. Further tests show that the relation is attenuated in higher ownership concentration and lower ex-ante institutional ownership firms. Our results indicate that share pledging can be beneficial to shareholders and important stakeholders like creditors by reducing the likelihood of corporate default. Our paper throws additional light on the economic impact of share pledging. Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market, our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with prior literature which shows that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms’ exposure to downside risk associated, share pledging can play a more positive role in our setting.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market
AU  - Hongmei Xu
Y1  - 2021/06/21
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210903.15
DO  - 10.11648/j.jfa.20210903.15
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 93
EP  - 100
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210903.15
AB  - In this paper, we assess the economic impact of share pledging by focusing on corporate debt default risk, the most disruptive events in the life of a corporation. Using Instrumental Variables and a regulatory change that increasing the possibility of share pledging as a quasi-exogenous shock, we establish that increased share pledging decreases corporate default risk. The baseline results are robust by eliminating the effect of financial crises, adding other control variables, constructing new PSM samples and use other proxies for default risk. Further tests show that the relation is attenuated in higher ownership concentration and lower ex-ante institutional ownership firms. Our results indicate that share pledging can be beneficial to shareholders and important stakeholders like creditors by reducing the likelihood of corporate default. Our paper throws additional light on the economic impact of share pledging. Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market, our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with prior literature which shows that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms’ exposure to downside risk associated, share pledging can play a more positive role in our setting.
VL  - 9
IS  - 3
ER  -

Copy | Download

Author Information

Hongmei Xu

Department of Finance, International Business College, South China Normal University, Guangzhou, China

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Hongmei Xu. (2021). Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. Journal of Finance and Accounting, 9(3), 93-100. https://doi.org/10.11648/j.jfa.20210903.15

Copy | Download

ACS Style

Hongmei Xu. Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. J. Finance Account. 2021, 9(3), 93-100. doi: 10.11648/j.jfa.20210903.15

Copy | Download

AMA Style

Hongmei Xu. Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market. J Finance Account. 2021;9(3):93-100. doi: 10.11648/j.jfa.20210903.15

Copy | Download

@article{10.11648/j.jfa.20210903.15,
  author = {Hongmei Xu},
  title = {Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {3},
  pages = {93-100},
  doi = {10.11648/j.jfa.20210903.15},
  url = {https://doi.org/10.11648/j.jfa.20210903.15},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210903.15},
  abstract = {In this paper, we assess the economic impact of share pledging by focusing on corporate debt default risk, the most disruptive events in the life of a corporation. Using Instrumental Variables and a regulatory change that increasing the possibility of share pledging as a quasi-exogenous shock, we establish that increased share pledging decreases corporate default risk. The baseline results are robust by eliminating the effect of financial crises, adding other control variables, constructing new PSM samples and use other proxies for default risk. Further tests show that the relation is attenuated in higher ownership concentration and lower ex-ante institutional ownership firms. Our results indicate that share pledging can be beneficial to shareholders and important stakeholders like creditors by reducing the likelihood of corporate default. Our paper throws additional light on the economic impact of share pledging. Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market, our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with prior literature which shows that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms’ exposure to downside risk associated, share pledging can play a more positive role in our setting.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Share Pledging and Corporate Default Risk: Evidence from the Chinese Stock Market
AU  - Hongmei Xu
Y1  - 2021/06/21
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210903.15
DO  - 10.11648/j.jfa.20210903.15
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 93
EP  - 100
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210903.15
AB  - In this paper, we assess the economic impact of share pledging by focusing on corporate debt default risk, the most disruptive events in the life of a corporation. Using Instrumental Variables and a regulatory change that increasing the possibility of share pledging as a quasi-exogenous shock, we establish that increased share pledging decreases corporate default risk. The baseline results are robust by eliminating the effect of financial crises, adding other control variables, constructing new PSM samples and use other proxies for default risk. Further tests show that the relation is attenuated in higher ownership concentration and lower ex-ante institutional ownership firms. Our results indicate that share pledging can be beneficial to shareholders and important stakeholders like creditors by reducing the likelihood of corporate default. Our paper throws additional light on the economic impact of share pledging. Although several studies argue that share pledging incentivizes corporate insiders to use corporate resources for private benefits and destroy firm value on the Taiwanese stock market, our findings indicate that share pledging facilitates external monitoring and enables creditors to protect themselves. Our overall findings are consistent with prior literature which shows that share pledging improves market value of Chinese A-share listed firms. We believe that as strong government intervention during market downturns may limit A-share listed firms’ exposure to downside risk associated, share pledging can play a more positive role in our setting.
VL  - 9
IS  - 3
ER  -

Copy | Download