Abstract

This paper investigates the unique and interesting phenomenon of the Guaranteed Employees Stock Purchase against Loss Program (GESPLP) that Chinese companies have initiated in recent years. The GESPLP encourages employees to buy shares and ensures them against losses for 12 months. We comprehensively investigate the direct reason, root reason, motivation, and consequences of this program. Based on manually collected data from all firms issued the GESPLP, we provide convincing evidence that companies with lower stock returns and higher stock pledges are more likely to initiate a GESPLP. The market reaction to the announcement of a GESPLP is positive in the short run. However, stock prices gradually revert to their pre-GESPLP level. Finally, our findings support the conjecture that the GESPLP is used to relieve the pressure of margin calls on corporate insiders' stock pledging in the short term. In a relatively long run, we observe the GESPLP indeed helps controlling shareholders reduce pledging level.

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