Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans
Forthcoming, Review of Financial Studies
67 Pages Posted: 27 Sep 2016 Last revised: 28 Jan 2019
Date Written: January 25, 2019
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: Suggested Citation