The impacts of share pledging on firm investment timing and valuation |
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| Institution: | 1. School of Public Administration, Nanjing university of Finance and Economics, China;2. Department of History of Science, Technology and Medicine, Peking University, China;1. School of Accounting, Capital University of Economics and Business, Beijing 100070, China;2. Business School, University of International Business and Economics, Beijing 100029, China;3. School of Economics and Management, Tsinghua University, Beijing 100190, China;1. School of Finance, Zhejiang Gongshang University, Hangzhou 310018, Zhejiang, China;2. School of Finance, Southwestern University of Finance and Economics, Chengdu 611130, Sicuan, China;1. Department of Accounting and Finance, Nottingham Business School, Nottingham Trent University, Nottingham, UK;2. Centre for Digital Finance, Department of Banking & Finance, Southampton Business School, University of Southampton, Southampton, UK;1. Audencia Business School, Research Center: Markets Technology and Society, 8 Route de la Joneliere, 44312 Cedex 3, Nantes, France;2. Heriot Watt University, Accounting, Economics and Finance SEEC, CFI, Edinburgh, Scotland EH14 4AS, UK |
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| Abstract: | This paper applies a model in the real options framework to analyze the impacts of controlling shareholder’s share pledging on corporate investment timing and valuation. We find that the optimal investment timing shows an inverted U-shape with the pledge ratio, indicating that share pledging exacerbates firms’ over-investment and worsens firms’ under-investment. Furthermore, share pledging hurts firms’ option value unless active measures are taken to control the pledging risks. The maintenance requirement can keep controlling shareholder from irrational early investments and protect investors from severe wealth losses. In addition, our work can provide testable empirical implications. |
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| Keywords: | Share pledging Real options Investment timing Inverted U-shape Empirical implications |
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