Impact of Controlling Shareholder Equity Pledge on Corporate Value

Haifeng Li (Shenzhen Hi-Tech Investment Group Co., Ltd, Chengdu, Sichuan)
Haiyi He (School of Finance, Southwestern University of Finance and Economics, Chengdu, Sichuan)
Yuanyuan Zhang (School of Securities and Futures, Southwestern University of Finance and Economics, Chengdu, Sichuan)

Abstract


As an innovative financing behavior, equity pledge breaks the limit of traditional financing, and broadens the financing channels of companies and major shareholders. This paper comprehensively considers the impact of controlling shareholder equity pledge on corporate value from three research perspectives. The main conclusions are as follows: (1) When the equity pledge is not considered, the cash flow rights and voting rights of the company owned by the controlling shareholder are positively correlated with corporate value. That is, this presents incentive effect, but the existence of the separation of the two powers brings the second type of agency problem and reduces corporate value. (2) When considering the equity pledge, the controlling shareholder’s equity pledge may weaken the incentive effect and strengthen the encroachment effect which causing a reduction of corporate value. (3) Based on the accounting point of view, the controlling shareholder’s equity pledge is negatively correlated with the corporate performance, while the concentration of ownership dilutes this negative effect. (4) The balance of equity weakens the negative effect of the controlling shareholder’s equity pledge on corporate value, thereby reduces the negative impact of the equity pledge.


Keywords


Separation of powers; Equity checks and balances; Equity concentration; Incentive effect; Encroachment effect

Full Text:

PDF

References


Yongwei Li, Ruoshan Li. “Tunnel Excavation” Under the Pledge of Listed Companies - A Case Study of Star Power Fund Black Hole [J]. Financial and Accounting, 2007(02): 39-42.

Xiangchao Hao, Qi Liang. Does the Ultimate Controller’s Equity Pledge

Damage Corporate Value? [J]. Accounting Research, 2009 (07): 57-63+96.

Bozec, Y, Laurin, C., Large Shareholder Entrenchment and Performance: Empirical Evidence From Canada, [J]. Journal of Business Finance & Accounting, 2008, 35(1) & (2): 5-49.

Joh S.W., Corporate Governance and Firm Profitability: Evidence From Korea Before the Economic Crisis, [J]. Journal of Financial Economics, 2003, 68: 287-322.

Xueqin Ju. Separation of Control Rights and Cash Flow Rights and Their Impact on Corporate Value - A Comparative Analysis of Natural Person HoldingCompany and State-owned Assets Supervision and Administration Corporation [J]. Dongyue Theory, 2012, 33(09): 168-172.

Yeh, Y.H, Ko, C.E., Su, Y.H., Ultimate Control and Expropriation of Minority Shareholders: New Evidence from Taiwan, [J]. Academic Economic

Papers, 2003, 31: 263-299.

Guojian Zheng, Dongjie Lin, Bin Lin. Equity Pledge, Occupation and Enterprise Value of Large Shareholders [J]. Journal of Management Science, 2014,17(09): 72-87.

Deren Xie, Wei Liao, Dengjin Zheng. The Equity Pledge of Controlling Shareholders and the Implicit Choice of Accounting Policies for Development Expenditure [J]. Accounting Research, 2017(03): 30-38+94.

Claessens, S., Djankov, S. and Joseph, R.H. Disentangling the incentive and Entrenchment Effects of Large Shareholdings [J]. Journal of Finance, 2002, 7(6): 2471-2771.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Corporate Ownership Around the World, [J]. Journal of Finance, 1999, 54: 471-517.

Liu Shaobo, Paradox of Control Benefits and Revenue of Control Rights -A New Theoretical Interpretation of Infringement of the Interests of Small Shareholders by Major Shareholders [J]. Economic Research, 2007(02): 85-96.

Xinhong Wang, Xing Zhang, Zerong Xue. Study on the Impact of Large Shareholder Equity Pledge on Company Performance—Based on the ModeratingRole of Internal Control [J]. Friends of Accounting, 2018(10): 58-64.

Hua Ji, Guojian Zheng. Daily Related Purchase and Sale Transactions Under the Control of Controlling Shareholders – “Performance Promotion”, “Empty” or “Camera Support” [J]. Finance and Accounting News, 2009(30): 60-63.

Sumei Ruan, Zhongming Ding, Yinguo Liu, Shanlin Yang. The “Inverted U-type” Hypothesis Test of Stock Balance and Corporate Value Creation Capability - Based on Panel Data Model [J]. China Management Science, 2014, 22(02):119128.



DOI: https://doi.org/10.30564/jesr.v3i1.1557

Refbacks

  • There are currently no refbacks.
Copyright © 2019 Haifeng Li, Haiyi He, YUANYUAN Zhang Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.