An Investigation of the Stock Pledging Behavior of The Directors of the Board and Supervisors

The purpose of this study is to find out the factors that influence the equity pledge behaviors of board of directors and supervisors in Taiwan listed companies. It is generally thought that the equity pledge of directors and supervisors will deteriorate the agency problem. They expropriate minor shareholders’ benefits by taking advantage of their relationship with companies. This will also devalue companies and result in poor firm performance to increase the probability of financial crisis. When we exam the companies that had financial crisis before, we find that they all have one thing in common – high equity pledge ratio. In previous studies, most papers explain that by the wealth constraint of directors and supervisors. Thus, in this paper, we want to find out other elements that also influence the equity pledge behavior of directors and supervisors.
At first, in order to test the relationship between equity pledge behavior of directors and supervisors and the characteristics of companies, we divide the data into two subgroups – companies with equity pledge and companies without equity pledge. And then, we also study on the difference in equity pledge ratio in different companies. We exam this from three perspectives: market environment, companies’ internal characteristics and corporate governance.
The empirical result shows that there are indeed some differences in companies’ characteristics between companies with and without equity pledge. For example, small companies have better firm performance. Besides, we also find that external market environment doesn’t affect equity pledge ratio significantly.
At last, our empirical result support that companies’ internal characteristics do affect equity pledge behavior of directors and supervisors. Greater debt ratio、smaller EPS and lower sales growth would lead greater equity pledge ratio in companies. Also, it’s more or less increase the explanation ability in equity pledge behavior of directors and supervisors after adding the corporate governance variable.