Monetary policy, assets mispricing and share pledge: empirical evidence from A-share listed companies of China

ABSTRACT

Based on the influencing factors of share pledging, this paper discusses the influence of asset mispricing on the share pledging decision-making of controlling shareholders and examines the differences in the impact of different monetary policies using China’s A-share listed firms from 2007 to 2018. This study found that when the share price is overvalued, the share pledging enthusiasm of controlling shareholders increases, and the scale of share pledging expands. Further examination found that the enthusiasm and the scale of share pledge of controlling shareholders increase significantly with the increase in the overvaluation level of the share price. When the monetary policy tends to be loose or the interest rate is low, the enthusiasm for share pledging increases, and the scale of share pledge expands, which is more obvious when the stock price is overvalued. This study indicates that the capital market is not perfect, and insiders represented by controlling shareholders can identify investors’ cognitive biases, respond to asset mispricing in time, and raise more funds.

KEYWORDS:

• Monetary policy
• assets mispricing
• share pledge
• stock markets
• China

JEL CLASSIFICATION:

• E52
• G12
• D53
• E44

Disclosure statement

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

Data availability statement

This research is based on the secondary data obtained from the Wind consulting database, the Zhongjing statistical database, and CSMAR database. The data is available upon request.

Notes

¹ M2 growth rate, GDP growth rate and CPI growth rate are all quarterly year-on-year growth rates.

² Macroeconomic prosperity index includes early warning index, consistency index (1996 = 100), leading index (1996 = 100), and lagging index (1996 = 100). Among them, the consistent index reflects the basic trend of the current economy, which is composed of four aspects: industrial production, employment, social demand (investment, consumption, and foreign trade), social income (national tax, enterprise profit, resident income) and so on. The leading index is composed of a group of leading indicators, which are used to forecast the future trend of the economy; the lagging index includes the lagging indicators that lag behind the consistent index, which is mainly used to confirm the peaks and valleys of the economic cycle; the early warning index divides the state of economic operation into five levels. “Red light” indicates that economy is overheated, “yellow light” indicates that the economy is partial heating, “green light” means that the economy is running normally, “shallow blue light” means that the economy is partial cold, “blue light” means that the economy is over cold.

³ Xu, He, and Chen (2016) classified the cost of share pledging of large shareholders into two parts: explicit currency cost and implicit cost. Among them, the explicit cost is the composition of the opportunity cost of share pledging (Article 68 of China’s security law stipulates that “the pledgee has the right to collect the fruits generated from the pledged property”) and the interest of share pledging loan. Implicit cost refers to the financial pressure faced by the major shareholders after the pledge of equity, including the decline of stock prices and their inadequate solvency, which triggers the “risk of transfer of control rights”.

⁴ Berger and Ofek (1995). Diversification’s Effect on Firm Value. Journal of Financial Economics, 37(1):39–65.

⁵ Feltham and Ohlson (1995). Valuation and Clean Surplus Accounting for Operating and Financial Activities. Contemporary Accounting Research, 11(2):689–731.