Do insiders facing pledging risks make risky corporate investments? Evidence from Chinese M&As

ABSTRACT

Prior studies find that insiders facing pledging risks pass up risky projects to preserve their private benefits of control. However, we find that firms with controlling shareholders’ share pledges (CSSP) tend to initiate mergers and acquisitions (M&As), which signal good news and prevent the stock price from falling. This phenomenon is more pronounced in non-state-owned enterprises (non-SOEs) and firms with negative market responses on the announcement date of share pledges. Additionally, due to cost control considerations, a firm with CSSP will choose small-size targets and complete M&As in a short time. Nevertheless, the long-term performance of such M&As is worse.

KEYWORDS:

• Share pledges
• controlling shareholders
• M&A decisions
• risk of losing control

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. For example, Julong Pipe announced the acquisition of mobile game developer EGLS Co., Ltd. in May 2014. Afterwards, the stock price of Julong Pipe rose from 13 yuan to approximately 24 yuan.

2. Sina Finance.2015. “Share pledge alarms go off frequently. Shareholders have their own tricks for breaking up. ” https://finance.sina.com.cn/stock/s/20150828/072623102052.shtml

3. Sina Finance .2018. “Warning of heavy A-share minefields: 876 pledges of individual stocks hit the closing line” http://finance.sina.com.cn/stock/stocktalk/2018-08-17/doc-ihhvciiw5436163.shtml

4. Shanghai Stock Exchange.2018.“Shanghai Stock Exchange, China Securities Clearing Revise Business Rules for Stock Pledge Repurchase Transactions” http://www.sse.com.cn/lawandrules/sserules/trading/stock/c/c_20180112_4449493.shtml

5. CSRC .2015. “Notice on Encouraging Mergers and Restructuring, Cash Dividends and Share Repurchases” http://www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201508/t20150831_283500.html

6. Sina Finance .2018. “Assessing the value-added ratio soars, low stock price stimulates ‘desperate for risk’” https://finance.sina.com.cn/stock/marketresearch/2018-05-18/doc-iharvfhu9699744.shtml

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [grant number 71672204, 71790603].