Does controlling shareholders' share pledging raise suppliers' eyebrows?

Abstract

Controlling shareholders' share pledging could exacerbate shareholder–creditor conflicts, which might elicit negative reactions from suppliers in offering trade credit. Using data concerning listed firms in China, we find that a higher level of controlling shareholders' share pledging makes it harder for firms to obtain trade credit from suppliers. This effect is more pronounced when the risk of control transfer is higher (vs. lower), when corporate governance is weaker (vs. stronger), and when firms have lower (vs. higher) market power. We further find that listed firms offer less trade credit to customers, and they obtain fewer short-term bank loans when their controlling shareholders pledge a larger (vs. smaller) proportion of shares. While enriching the literature on the economic consequences of insiders' share pledging and the research on trade credit, this paper also has important practical implications for firms and their stakeholders.