Abstract
Adopting fair value measurement may bring more earnings fluctuations and induce irrational psychology and radical financing behavior of managers and major shareholders. Based on behavioral corporate governance theory, using the sample of A-share nonfinancial listed companies of China during 2015–2017, this paper empirically examines the regulatory effect of fair value measurement; that is, whether fair value measurement affects the company’s financing decisions when major shareholders have irrational psychological characteristics, i.e., overconfidence. The study found that overconfident major shareholders increase the probability of equity pledge and increase the proportion of equity pledge; further inspection found that if the level of accrued earnings management is higher, the adjustment effect of fair value measurement is also higher; when the risk of stock price collapse is higher, fair value measurement obviously increases the probability and ratio of overconfident major shareholders’ equity pledge. The above conclusions provide empirical evidence that fair value measurement has a positively regulatory effect on financing decisions of major shareholders.
Highlights
With the development of the market, when people study the issue of corporate governance mechanisms, they find that the behavior of managers more or less shows the characteristics of bounded rationality
Columns (1) and (2) are the regression results of model equity pledge (Psg) and model pledge ratio (Ratio), respectively. e multiplication item (Afv × Con) in column (1) represents the influence of fair value measurement on the overconfidence of major shareholders. e regression result is significantly positive at the 1% level, indicating that the adjustment effect of fair value measurement will increase the probability of Equity Mortgage behavior of overconfident major shareholders. e coefficient of the crossover term (Afv × Con) between the fair value measurement and the manager’s overconfidence in column (2) is significantly positive at the 1% level. is fully verified Hypothesis 1 shows that fair value measurement will greatly increase the probability of overconfident major shareholders’ equity pledge and increase the proportion of equity pledge
When a company is affected by the economic environment, the adjustment effect of fair value measurement is significantly reduced, and the level of corporate governance within the company will inhibit the adjustment effect of fair value measurement to a certain extent. rough the above inspection, it can be shown that good internal corporate governance and external supervision can help reduce the regulatory role of fair value measurement [35, 36]
Summary
With the development of the market, when people study the issue of corporate governance mechanisms, they find that the behavior of managers more or less shows the characteristics of bounded rationality. For companies with fair value measurement assets, for the purpose of avoiding the risk of control transfer, on the one hand, major shareholders may prefer to use fair value measurement for real earnings management [3] to maintain performance. E existing literature shows that there is room for the management to manipulate the fair value measurement [4]; on the other hand, for overconfident major shareholders, they subjectively tend to ignore the possibility of fair value liabilities, and they hope to reduce the actual control transfer risk by increasing the stock price through fair value changes. E study found that for companies that use fair value measurement, overconfident major shareholders will increase the probability and ratio of equity pledges. Possible contributions are as follows: (1) expand the application of behavioral corporate governance theory in fair value measurement; (2) it can enrich the relevant literature on the behavioral decision-making of overconfident major shareholders; and (3) provide reference for the financing decisions of companies that use fair value to measure assets
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