One way out of the share pledging quagmire: Evidence from mergers and acquisitions

Share pledging by controlling shareholders is accompanied with a risk of control transfer when stock price decline triggers a margin call. This situation motivates controlling shareholders and firms to initiate value-enhancing activities to manage the pledging quagmire. Using a sample of Chinese listed firms, we find that firms with pledging controlling shareholders are more likely to implement mergers and acquisitions (M&As) than other firms. Their M&As also perform better, regardless of whether using short- or long-term stock returns or operating income as the performance measure. Furthermore, the positive effect of share pledging on M&As is more pronounced in non-state-owned enterprises, firms with individual controlling shareholders (especially families), firms with better governance, and firms with higher financial capabilities. Additional analyses on deal types also show that firms with pledging controlling shareholders are more likely to engage in diversified, non-affiliated, and cash-financed acquisitions. These results consistently suggest that M&As may effectively eliminate firms' pledging risks and that share pledging mitigates shareholders' conflict of interest regarding M&A decisions.     

Do controlling shareholders collude with their related large shareholders? Evidence of equity pledges and shareholding increases from China

The key for controlling shareholders to prevent the risk of equity pledge is to increase the stock price, and the large shareholders' shareholding increases have the effect of increasing the stock price. Using the data of Chinese A-share firms from 2007 to 2019, this paper examines the relationship between the controlling shareholders' equity pledges and their related large shareholders' shareholding increases. We find that when the controlling shareholders pledge equity, their related large shareholders are more likely to increase their shareholdings. By analyzing the necessity, ability and motivation of related large shareholders to provide help, we find that shareholding increases of related large shareholders are behaviors of helping controlling shareholders to mitigate the risk of equity pledge. Based on the analysis of external acquisition threats, stability heterogeneity of control rights and exogenous impact of Vanke Equity Competition, it is shown that the controlling shareholders pledging equity promote their related large shareholders to increase their shareholdings for the purpose of preventing the risk of control transfer. In further analysis, we find that the shareholding increases of related large shareholders have the practical effect of improving the stock price and preventing pledge risks. This paper proves that the controlling shareholders pledging equity collude with their related large shareholders, which is reflected in the fact that the shareholding increases of the related large shareholders have become a means for controlling shareholders to prevent the risk of equity pledge.     

Zero-leverage policy and stock price crash risk: Evidence from Korea

This study examines the difference in stock price crash risk between zero-leverage and non-zero-leverage firms. We find that zero-leverage firms have a significantly higher future stock price crash risk than non-zero-leverage firms. Next, we find that the positive relation between zero-leverage policy and future stock price crash risk is more pronounced when firms have higher controlling shareholders' ownership and foreign ownership. We also find that the positive relation is more pronounced for firms with low cash holdings than for those with high cash holdings. Further, we find that the positive relation is stronger for dividend-paying firms than non-dividend-paying firms. Our results are robust to alternative estimation specifications and endogeneity concerns. Overall, our findings shed light on the extent to which extreme corporate financial policy has an impact on future stock price crash risk. Our empirical evidence also provides meaningful implications for how stakeholders (especially investors) predict stock price crash risk in the context of extremely conservative capital structure.     

Impact of share pledging by controlling shareholders on firm value in the context of China's tightened regulatory reforms

This study investigates the effect of the 2018 regulatory reforms of share pledging by a controlling shareholder on firm value in China. Using a dataset spanning the period 2015 to 2020, we provide robust results suggesting that tighter regulations effectively reduce firms' crash risk, relax financial constraints, reduce bankruptcy risk, and mitigate the controlling shareholder expropriation of minority shareholders' wealth via tunnelling. Additionally, controlling shareholders, by investing more pledged funds in the listed firm after reforms, foster capital investment and R&D expenditure, which benefit firm growth and competitiveness and ultimately increase firm long-term value.     

Audit firm's Confucianism and stock price crash risk: Evidence from China

This study examines the association between audit firm's Confucianism and stock price crash risk. We postulate that Confucian moral standards predict a mixed relationship between audit firm's Confucianism and stock price crash risk. Using a large sample of listed firms in China during 2006–2018, we find that audit firm's Confucianism is positively related with client's future stock price crash risk, implying that Confucianism of audit firm aggravates client's bad news hoarding behavior. The effect is more pronounced for client without female auditors and/or with closer personal relationship with auditors. Mechanism analysis shows that audit firm's Confucianism exacerbates crash risk by worsening audit quality and information transparency. Political discipline and external monitoring help to alleviate the negative influence of audit firm's Confucianism on stock price crash risk.     

Share pledging,payout policy,and the value of cash holdings

Share pledging for insiders’ personal bank loans is associated with the agency problems of insider risk aversion and stock price crash risk. We examine the relation between insider share pledging and the value of cash holdings using the pledging data of listed firms in Taiwan. We find that the value of cash holdings is lower for pledging firms, especially for those that are relatively more risk averse. Pledging firms that repurchase shares have a higher marginal value of cash than those with other payout methods, likely due to the role of repurchases in reducing the stock price crash risk. Our results show how insiders’ personal financing incentives arising from share pledging would affect the value of cash holdings from the perspective of agency problems and payout policy.     

Minority shareholders' activism and stock price crash risk: Evidence from China

This study investigates the effect of minority shareholders' activism on stock price crash risk in the Chinese stock market. Using a novel dataset on minority shareholders' attendance at annual general meetings (AGMs), we find that minority shareholders' attendance, especially the onsite attendance, significantly exacerbates firms' future crash risk. The results are robust to instrumental variable approach, placebo tests, and alternative measures of minority shareholders' attendance and crash risk. We also find three channels: incremental analyst following, media coverage and retail attention, all of which expand market pressure and exacerbate managers' incentives to withhold bad news. Extended analyses show that the impact of minority shareholders' attendance is less pronounced among firms with better investor protection. Overall, our findings are helpful to understand the importance of minority shareholders' activism and its unintended consequences on stock market in the emerging economies.     

Internal whistleblowing and stock price crash risk

We investigate the impact of internal whistleblowing on stock price crash risk in China. We expect that internal whistleblowing plays a crucial role in preventing firms from misconducting, which would result in a lower stock price crash risk. Consistent with this conjecture, the empirical evidence negatively correlates internal whistleblowing and stock price crash risk. Our results remain robust when adopting the instrumental variable, propensity matching method, and Heckman's two-stage model. Path analysis shows that internal whistleblowing lowers the crash risk by reducing firms' accounting violations and executives' frauds. The effect is more pronounced in firms with a positive organizational environment and non-state-owned firms. Overall, the study contributes to the emerging literature on the governance role of whistleblowing.     

Does societal trust make managers more trustworthy?

This study examines the effects of shareholders' trust on managers' bad news hoarding. Using a large sample of listed firms from 33 countries, we find that firms domiciled in countries with higher societal trust have higher stock price crash risk, which indicates that managers may exploit shareholders' trust to conceal bad news and that a low-trust society can be beneficial in restraining management misconduct due to the monitoring undertaken by low-trust outsiders. We also find that the positive association between societal trust and crash risk is less pronounced (1) when low-trust foreign shareholders have greater control over a country's firms, in line with the view that low-trust shareholders' concerns about being expropriated by managers and the consequent strong efforts at monitoring; (2) when long-term investors have greater control over a country's firms, suggesting that long-term investors playing a complementary role in monitoring corporate governance; and (3) when a country has strong formal institutions, such as investor protection and financial accounting systems, suggesting that robust formal institutions are substitute for social norms.     

Stock price crash risk and internal control weakness: presence vs. disclosure effect

This study examines the stock price crash risk for a sample of firms that disclosed internal control weaknesses (ICW) under Section 404 of the Sarbanes‐Oxley Act (SOX). We find that in the year prior to the initial disclosures, ICW firms are more crash‐prone than firms with effective internal controls. This positive relation is more pronounced when weakness problems are associated with a firm's financial reporting process. More importantly, we find that stock price crash risk reduces significantly after the disclosures of ICWs, despite the disclosure itself signalling bad news. The above results hold after controlling for various firm‐specific determinants of crash risk and ICWs. Using an ICW disclosure as a natural experiment, our study attempts to isolate the presence effect of undisclosed ICWs from the initial disclosure effect of internal control weakness on stock price crash risk. In so doing, we provide more direct evidence on the causal relation between the quality of financial reporting and stock price crash risk.     

How does institutional investors' information acquisition inhibit share pledging? Evidence from China

This study investigates whether and how institutional investors' information acquisition affects controlling shareholder's share pledging. Taking a unique data of institutional investors' corporate site visits in China, we find that institutional investors' corporate site visits significantly inhibit controlling shareholder's share pledging. This effect is robust to a series of robustness checks, including controlling for endogeneity concerns, propensity score matching method, alternative model specifications, and alternative measures of the independent variable. We then provide evidence that the negative relation between institutional investors' corporate site visits and controlling shareholder's share pledging is more pronounced for listed firms with less efficient information environment and weaker corporate governance. Further analysis indicates that the negative relation is also more pronounced when controlling shareholders are under higher margin call pressure and when the visiting institutional investors consist of more fund companies. Overall, our study is the first to provide direct evidence of the governance mechanism of financial intermediaries on shareholders' pledging decisions.     

资金占用、股价暴跌风险对信息透明度的影响研究

以1999-2014年中国 A 股主板上市公司为研究样本,考量资金占用、股价暴跌风险对信息透明度影响。结果表明：大股东的资金占用程度越高,越容易给公司股价带来暴跌风险;股价发生暴跌后管理层采取相应策略改善形象,提高公司信息透明度。鉴此,投资者应利用大股东资金占用、股价暴跌与信息透明度之间的逻辑关系,构建投资套利组合;同时监管者需加强对大股东资金占用和信息透明度的监管,保护中小投资者利益。     

Audit Effort and Stock Price Crash Risk

We examine how stock price crash risk is affected by audit effort, as measured by audit hours. Using a unique dataset of audit hours in China, we find that audit effort is negatively related to crash risk. The negative impact of audit effort on crash risk is more pronounced for listed firms that have higher inherent risks and weaker external monitoring of their information environment. Our findings are robust to various tests, including a two-stage regression analysis, controlling for listed firm-fixed effects and audit firm-fixed effects, and using alternative measures of crash risk. In addition to audit output measures, audit effort has an incremental influence on crash risk. The effects of audit effort on crash risk continue to hold after controlling for auditor industry expertise and auditor tenure.     

What firm risk factors drive bank loan pricing and other terms? Evidence from China

This study investigates how firm risk factors affect bank loan pricing. Although firm-specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non-price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.     

Does alternative data reduce stock price crash risk? Evidence from third-party online sales disclosure in China

This study empirically investigates the effect of releasing alternative data on firm-specific price crash risk. Using the public launch of a firm's third-party online sales data in a well-known Chinese financial database as an exogenous shock, we find that stock price crash risk significantly decreases with the disclosure of third-party online sales data. The results are robust to a series of endogeneity corrections and robustness checks. We also find that the reduction of stock price crash risk is due to the decrease in managers' bad news withholdings and the increase in the accuracy of market expectations. In addition, the negative association between third-party online sales disclosure and crash risk is more pronounced for firms with weaker external governance, higher earnings volatility, greater likelihood of sales manipulation, and lower book-to-market ratio. Our findings yield important implications for a comprehensive understanding of the information disclosure effect of online sales data in the capital market and the mechanisms to reduce stock price crash risk.     

Share pledges,tone of earnings communication conferences,and market reaction: evidence from China

We investigate how share pledging affects firms’ disclosures and influences investors in Chinese stock market. The tone of firm disclosures when there are shares pledged by controlling shareholders is more positive than that of firms without them. Considering tone inflation motivation and ability simultaneously, we find share pledge risk has an inverted U‐shaped relation with tone. Investors react positively to tone in short‐run windows, and firms with controlling shareholders’ pledges have higher stock returns for earnings communication conferences. We identify an inverted U‐shaped link between margin distance of controlling shareholders and stock returns for earnings communication conferences.     

Employee relations and stock price crash risk: Evidence from employee lawsuits

In this paper, we examine the effect of firms' employee relations, measured by the number of employee lawsuits divided by the total number of employees, on stock price crash risk. Firms with higher employee lawsuit ratios tend to have higher stock price crash risk. Our results are robust after addressing possible endogeneity and using alternative measures of employee relations and stock price crash risk. We also find that the association between the employee lawsuit ratio and stock price crash risk is less prominent for state-owned enterprises, for firms with stringent external monitoring, and for firms with positive earnings news. Finally, earnings aggressiveness appears to be the channel through which the employee lawsuit ratio affects stock price crash risk. Collectively, our study is in line with the stakeholder theory, and highlights the importance of employee lawsuit for preventing crash of stock price.     

Institutional cross-ownership and stock price crash risk

Using manually collected data of Chinese listed firms during the period 2007–2018, we provide strong and robust evidence that institutional cross-ownership is negatively associated with firm-specific stock price crash risk. Building on China’s institutional settings, we document that the negative relation is more pronounced for firms located in provinces with higher political uncertainty, or state-owned enterprises. This paper also conducts several mechanisms analyses and has confirmed three potential influencing mechanisms, such as information advantage, governance improvement and anticompetitive incentives, in explaining the effect of institutional cross-ownership on stock price crash risk. Overall, this paper develops a new perspective to investigate the ways to alleviate stock price crash risk in emerging markets.     

The benefit of being a local leader: Evidence from firm-specific stock price crash risk

This paper investigates whether being a local leader affects a firm's stock price crash risk. We find that local leadership, in terms of being a relatively large firm in a surrounding locality, decreases a firm's stock price crash risk. The results are robust to both an instrumental variable and a difference-in-differences regression approach. We also document that the impact on crash risk depends on the extent to which local communities are likely to be monitoring local firms through their stock market participation rates, the information environment surrounding these firms, and the level of industry competition. Overall, our results highlight a novel benefit of being a local leader, as it is associated with a higher level of local monitoring which renders the firm less prone to crash risk.     

News-based ESG sentiment and stock price crash risk

From the perspective of ESG news-based sentiment, we examine the impact of ESG performance on stock price crash risk. This paper constructs a sentiment index based on ESG news to measure public opinion of listed firms. First, there is a significant negative relationship between ESG news sentiment and stock price crash risk, indicating that higher ESG news sentiment can reduce the crash risk. Second, heterogeneity analysis demonstrates that ESG sentiment has a greater impact on crash risk reduction for firms with lower analyst coverage, lower information transparency, voluntary ESG information disclosure and non-state-owned. In addition, mechanism tests indicate that ESG sentiment affects stock price crash risk by reducing negative ESG incidents, information asymmetry, and agency costs. This paper examines the research inference that ESG news sentiment is beneficial in reducing stock price crash risk and expands the research on the governance mechanism of stock price crash risk.