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

Ying Dou, Ronald W. Masulis, Jason Zein
2017 Social Science Research Network  
We investigate the consequences of insiders pledging company stock as collateral for personal loans. We take advantage of pledging disclosure requirements in Taiwan and then exploit a major regulatory change pertaining to pledging to help us identify the causal effects of pledging on shareholder wealth. We find improvements in shareholder wealth when managers significantly reduce pledging. We focus on two channels through which pledging can reduce shareholder wealth. First, we show that margin
more » ... e show that margin calls triggered by price falls can increase the downside risk of a company with pledged stock. Second, since managers can bear significant personal costs in meeting large margin calls, we hypothesize and find that pledging is followed by several changes in corporate policies that are consistent with greater risk aversion. JEL classification: G31; G34; G35.
doi:10.2139/ssrn.2843888 fatcat:7oauddcp4jf5jgmfleimy5l6se