Share pledging for seasoned equity offerings? Evidence from China

ABSTRACT

We investigate an unexplored channel through which pledged loans are exploited by the most influential firm insiders in China. Specifically, we document a significant and positive relationship between net pledging by the largest shareholder before a seasoned equity offering and her cash subscription to that very offering.

KEYWORDS:

• Share pledging
• loans
• seasoned equity offering
• largest shareholders

JEL classification:

• G32
• G34
• G38

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ China did not shift to a U.S.-style registration-based system for stock offerings during our sample period.

² Meanwhile, there are 1,243 initial public offerings (IPOs) conducted by non-financial A-share firms.

³ It is possible that pledging to finance the subsequent issuance takes place in an earlier interval. In a following study, however, we show that the effect of net pledging during the preceding year before an issuance is virtually nonexistent.

⁴ Note that pledged loans can be used to purchase more stock. In turn, a rise in stock ownership can provide a positive signal to offset the negative short-term announcement effect of SEOs observed by Masulis and Korwar (1986) or the poor long-run performance of issuing firms documented by Loughran and Ritter (1995).

⁵ We further investigate two groups of SEOs: 1) those in which shares are issued purely to raise cash and thus the offerings tend to delever the company; 2) those in which share are issued to raise cash and to acquire assets such that the offerings aim more likely at making new investments. The results show that the impact of share pledging on cash subscription is larger in the first group.

Additional information

Funding

This work is supported by The China National Social Science Fund under [Grant No. 19BJL060].