Controlling Shareholder Stock Pledge, Aggravated Expropriation and Corporate Acquisitions
47 Pages Posted: 23 Jun 2020 Last revised: 11 Sep 2020
Date Written: September 11, 2020
We examine the effects of controlling shareholder stock pledge on corporate acquisition decisions and associated performance. Consistent with our aggravated expropriation hypothesis, we find that pledging firms in China initiate more takeovers, but these acquisitions conducted by pledging firms experience lower announcement returns. We adopt the difference in differences and the instrumental variable approaches to establish causality. Channel tests further reveal that pledging acquirers overpay for the deals and are more likely to be involved in related party transactions. Cross-sectionally, we find that the relations between the share pledge and corporate acquisitiveness and returns are more pronounced for non-SOEs and firms with high-level excess cash. Lastly, we document that pledging acquirers underperform in the long-run in terms of lower ROAs and a greater likelihood of goodwill impairment. Overall, our findings indicate that controlling shareholders increasingly expropriate minority shareholders through self-serving corporate takeovers after the stock pledge.
Keywords: Stock pledge; Controlling shareholder; Merger and acquisition; Corporate governance
JEL Classification: G34; G32; G14
Suggested Citation: Suggested Citation