THE MOTIVATION BEHIND EQUITY PLEDGING: AN EMPIRICAL STUDY OF EQUITY PLEDGE IN THE CHINESE STOCK MARKET

Abstract

Share pledging, an alternative financing method which is seldom employed in the developed financial markets, is very prevalent in China. Almost all listed A-Share companies had pledged their shares sometimes after IPO. Most existing studies (in English and in Chinese) focused on the argument of agency theory, arguing that share pledging could cause conflict of interest between shareholder and the company. This paper identifies the link between share pledging and financing need (proxy by Capital Expenditure / Revenue), consistent with the positive effect of share pledging on firms’ ability to finance investment. Furthermore, this paper also studies how two policies on share pledging implemented in June 2013 and July 2015, the 2013 policy allow securities companies to enter the share pledging market as financer under a stock exchange mechanism while the 2015 policy further liberalised securities companies’ participation in share pledging by allowing them to structure OTC transactions. This paper finds that there is a higher tendency for private sector companies to conduct share pledging after the implementation of each of the two policies. The findings suggest that both policies have achieved some level of their intended purpose, resulting in higher liquidity and more financing for companies that needed capital.