Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans

Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans

Ronald Masulis, Ying Dou, Jason Zein

Series number :

Serial Number: 
592/2019

Date posted :

January 29 2019

Last revised :

November 21 2018
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Keywords

  • Pledging • 
  • Managerial incentive • 
  • Crash risk • 
  • risk-taking

We study a wide-spread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect.

First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forego private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
 

Authors

Real name:
Ying Dou
Research Member
School of Banking and Finance, Australian School of Business
Real name: 
Jason Zein