Controlling shareholder share pledging and stock price crash risk: Evidence from China

Abstract

Using the unique setting of the Chinese market from 2003 to 2018, this study examines how share pledging behavior affects firms' stock price crash risk by analyzing the costs and benefits of the controlling shareholder's pledging decision to hoard bad news. We find that during the controlling shareholder share-pledging period, pledged firms exhibit significantly higher future stock price crash risk than their non-pledged counterparts. The risk is also higher during this period relative to in shareholders' own pre-pledging and post-pledging benchmark periods. Considering the internal and external information environment, we further observe a less pronounced increase in stock price crash risk for pledged firms with a strong internal control system and for those with more media attention. Together, our results reveal controlling shareholders' hedging motivations for engaging in pledging activities and the role played by the internal and external information environment in constraining the opportunistic behavior of controlling shareholders.