A tale of riskiness: The real effects of share pledging on the Chinese stock market

Abstract

This paper examines the relation between share pledging and corporate risk-taking in an environment featured by strong government intervention and high information opacity. We find that during the years 2005 through 2015, the level of share pledging is associated with less volatile earnings and tightened R&D expenditures for Chinese listed firms. We establish causality through a variety of econometric techniques, including a difference-in-differences approach based on a regulatory change that permits security companies to lend money to borrowers pledging their shares as collaterals. In addition, we find that share pledging is associated with enhanced innovation efficiency. Overall, our results highlight that share pledging constrains excessive risk-taking and improves the efficiency of risky investments through facilitating creditor monitoring.