Firm Financing through Insider Stock Pledges

Abstract

Abstract This paper documents fund usages of insider share pledge loans based on transactions data and subsequent corporate activities in Chinese firms. We find that the market has expanded 111 times since 2003, reaching 2.9 trillion RMB by 2017. The expansion is driven by share pledges for financing firms, including focal listed firms and other firms. Among transactions for financing focal listed firms (17.4%), 87% of the funds flow into the firms. Each 1% increase in controlling shareholders’ ownership is associated with a 7.8%∼11.7% increase in the likelihood of pledging shares to finance the focal listed firms and an additional 2.1% to 5.7% for financially constrained firms. The stock market reacts to transactions for financing focal listed firms with abnormal returns around 0.26%∼0.65% and an additional 0.29%∼4.37% for financially constrained firms. These patterns do not exist for share pledges for other purposes or by noncontrolling shareholders.