The Effect of Stock Pledge on Corporate Fraudulence: Evidence from China

Abstract

This paper studies whether and how controlling shareholders’stock pledge affects corporate fraudulence. We find that both the pledge behavior and the pledge ratio of the controlling shareholders are positively associated with future corporate fraudulence. The results are robust after addressing endogeneity issues by using PSM and IV approach. We then provide evidence that the increasing effect of stock pledge on fraudulence is probably due to the controlling shareholders’fear of control transfer. Finally, we find that high media- or investor attention can effectively weaken the positive effect of stock pledge on corporate fraudulence.

Keywords: Stock pledge, Control transfer, Corporate fraudulence