Abstract
We investigate the consequences of insiders pledging company stock as collateral for personal loans. Exploiting a new regulatory restriction on voting pledged shares, we document a negative causal impact of pledging on shareholder wealth. We document two channels through which this occurs. First, margin calls triggered by exogenous price falls appear to exacerbate the crash risk of pledging firms. Second, since insiders can suffer significant losses of private benefits of control in meeting large margin calls, we hypothesize and find that pledging is followed by several changes in corporate policies that are consistent with greater risk aversion.
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