The Controlling Shareholders’ Pledging Behavior and Firm Performance
Date Issued
2004
Date
2004
Author(s)
Su, Wan-Ting
DOI
en-US
Abstract
Abstract
This essay mainly investigates the pledging behavior of corporations. Over the past few years, the field in corporate governance, an indicator of the performance of each firm, has prospered. Pledging is a commonplace among Taiwan firms. However, the difference between the traditional debt contract and the pledging is the collateral. Some fixed assets, such as the land, the machinery or a factory are usually the collateral of the traditional debt contract. Unlike the traditional debt, the collateral of the pledging is the stock whose value will be volatile every day. Once the value of the collateral falls lower than its original value, the borrower may have to submit more stock or their possessions will be sold out. During the financial crisis of 2000, many bankrupt firms were found to engage in some highly pledging behavior. This evidence also illuminates the research of the pledging.
The first contribution of this paper is to explore hidden rationales for the pledging behavior. Literature has documented that the controlling shareholders may pledge stocks and get financial aids to maintain their controlling status in the firm or overcome some financial constraints. For those controlling shareholders, the pledging is an accessible financing way to release their financial constraints. If the hypothesis is true, the pledging ratio should be positively correlated with the magnitude of the wealth constraints. We employ many proxies to represent the magnitude of financial constraints, such as the separation of ownership and control, the cash flow right, and the ownership of the board. If the controlling shareholders face tighter financial constraints, they may engage in the cross shareholding or the pyramid structure that will make the cash flow rights deviate from the controlling right. If the hypothesis about the financial constraints is true, then the pledging level and the separation of ownership and control should be positively correlated. In addition, tighter wealth constraints may lead to smaller cash flow right or the smaller ownership of the board. The pledging level and these two proxies should be negatively correlated if the hypothesis about the financial constraints is correct. The empirical results in this study also justify the hypothesis. Meanwhile, firms in a financial-tight group tend to have higher pledging ratio in terms of their group structure data.
The second contribution of this paper is to verify the correlation between the pledging behavior and the operating performance in a firm. We employ certain methods, like the regression and the portfolio sorting, and conclude that the pledging level has negative impact on the stock performance and the ROA of the firm and will increase the firm’s operating risks. On the other hand, if the controlling shareholders expand the pledging level in a shorter period of time, the future operating performance of the firm tends to be better. This may suggest that the pledging level ought be accumulated over a longer period of time out of the wealth constraints. Nevertheless, controlling shareholders accommodate their pledging level in accordance with outlooks about the firm. The pledging itself is a risky financing facility so that the controlling shareholders might borrow more as they hold optimistic views about future
The third point is to inspect how the agency problems take place and how the pledging damages the value of the firm. With the data received, we discover that firms with higher pledging level tend to involve in some kinds of related party transactions which will benefit specific people at the cost of he firm value. That is, the pledging behavior may induce some controlling shareholders to violate the principle of value-maximization of the firm and increase the agency problems.
Subjects
質押
關係人交易
控制股東
代理問題
財富限制
Wealth Constraints
Agency Problem
Personal Stock Loan
Pledging
Controlling Shareholders
Related Party Transactions
SDGs
Type
thesis
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