Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans

67 Pages Posted: 27 Sep 2016 Last revised: 28 Jan 2019

See all articles by Ying Dou

Ying Dou

Monash University

Ronald W. Masulis

University of New South Wales - Australian School of Business; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Jason Zein

UNSW Business School; Financial Research Network (FIRN)

Date Written: January 25, 2019

Abstract

We study a wide-spread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forego private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.

Keywords: Pledging, Managerial incentive, Crash risk, Risk-taking

JEL Classification: G31, G34, G35

Suggested Citation

Dou, Ying and Masulis, Ronald W. and Zein, Jason, Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans (January 25, 2019). Forthcoming, Review of Financial Studies; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 592/2019. Available at SSRN: https://ssrn.com/abstract=2843888 or http://dx.doi.org/10.2139/ssrn.2843888

Ying Dou (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Ronald W. Masulis

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Jason Zein

UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855858 (Phone)
+61 2 93855858 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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