Abstract
Share pledging has become popular as a method of loan collateral among Chinese shareholders. Our research used a sample of Chinese listed firms between 2008–2018 and produced two main findings. Firstly, we found a negative association between stock price risk and firm profitability. Our second finding was that the interaction effect of share pledging and stock price risk is greater on firm profitability than the effect of stock price risk itself. We examined the role of share pledging by modeling pooled OLS and fixed effects using share pledging behavior, controlling shareholders’ share pledging and the share pledging ratio to reinforce the robustness of our results. Furthermore, we investigated the Davis Double Play effect of share pledging to analyze how share pledging affects stock price risk. We found that higher EPS and investor expectations cannot mitigate the positive impact of share pledging on stock price risk. That is, the reduction of EPS and the deterioration of investor expectations caused by share pledging risk will not further aggravate the stock price risk, as shareholders may have taken some managerial actions to affect the transmission mechanism.
Highlights
Turmoil in financial markets disrupts the real economy and brings uncertainty to firms
Taking the influence of share pledging on stock crash risk or firm value [10, 15, 16], we investigated the amplifying role of share pledging in the relationship between stock price risk and firms’ profitability, especially the transmission mechanism of share pledging influencing stock price risk by exploring the channel of Davis Double Play effect of share pledging
Based on the assumption that share pledging affects the relationship between stock price risk and firm’s profitability, we explored the Davis Double Play effect of share pledging on stock price risk
Summary
Turmoil in financial markets disrupts the real economy and brings uncertainty to firms. A typical example of financial risk contagion was the 2008 worldwide economic crisis which spread the risk from the financial sector to the real economy. We decided to investigate how stock price risk links with corporate development. In order to guard companies against systemic financial risk, the Chinese government emphasized that the financial sector should achieve the fundamental purpose of serving the real economy. Firms usually conduct market value management to maintain the stock price and to avoid stock price volatility affecting corporate development. Stock price risk would increase a firm’s financing costs and aggravate the financing constraints, which in turn may hinder project investment and lead to loss, which is harmful to sustainable corporate development.
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