A Hidden Consequence of Share Pledge Business

41 Pages Posted: 15 Jun 2020 Last revised: 4 Aug 2020

See all articles by Maoliang Li

Maoliang Li

Xiamen University - Institute for Financial and Accounting Studies

Juan Luo

University of Adelaide - Business School; Financial Research Network (FIRN)

Limin Xu

University of Adelaide - Business School

Ralf Zurbruegg

University of Adelaide; Financial Research Network (FIRN)

Date Written: February 19, 2019

Abstract

This paper investigates a hidden consequence of the share pledge business. We find that, relative to the recommendations issued by independent analysts, affiliated analysts under brokerage pressure to protect share pledge business exhibit an optimistic bias in their recommendations. Our results are robust when using firm-year-quarter fixed effects in our regressions, when we control for other business connections that might exist between the broker and the firm, and when we conduct an exogenous shock test relating to stocks that become shortable. We further find that our main result is more pronounced when pledged shares experience lower growth in earnings, when pledged share prices drop closer to margin call levels, when pledged shares have higher crash risk, and when the amount of lending backed by pledged shares is larger. Pledge business connected analysts are also more likely to issue favorable recommendations when reputation costs are low, when firms are hard to value, and when firms are dominated by retail investors.

Keywords: Share pledge business; Hidden consequence; Analyst optimism

JEL Classification: G20; G24; G30

Suggested Citation

Li, Maoliang and Luo, Juan and Xu, Limin and Zurbruegg, Ralf, A Hidden Consequence of Share Pledge Business (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=3604746 or http://dx.doi.org/10.2139/ssrn.3604746

Maoliang Li

Xiamen University - Institute for Financial and Accounting Studies ( email )

422 Siming South Road
Xiamen, Fujian 361005
China
0592-2182768 (Phone)
0592-2181787 (Fax)

HOME PAGE: http://ifas.xmu.edu.cn/info/1023/1908.htm

Juan Luo (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia
+61 8 8313 0133 (Phone)
+61 8 8223 4782 (Fax)

Financial Research Network (FIRN)

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

Limin Xu

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

Ralf Zurbruegg

University of Adelaide ( email )

233 North Terrace
Department of Finance
Adelaide SA 5005
Australia
+61 8 8303 5535 (Phone)
+61 8 8303 4368 (Fax)

Financial Research Network (FIRN)

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

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