Share‐loan pledging and relaxation of share‐repurchase restrictions in China

Abstract

We examine a period in which the in-principle prohibition of share repurchases was relaxed in 2018 to allow for the repurchase of shares whose prices dropped materially or were below book value. We find that share-loan pledges by controlling shareholders are significantly and positively associated with share repurchases for a sample of 3,531 Chinese firms. This finding is robust using entropy and propensity score matched samples, 2SLS IV regressions, regression discontinuity design (RDD), and two exogenous shocks (the China-US trade war in 2018 and the COVID-19 pandemic in 2020). The association remains robust but becomes less strong with state ownership and with above industry average firm agency problems, leverage ratios and financial constraints/distress (i.e., other share repurchase motives). Our findings highlight the importance of financial market regulations on share-loan pledging and share repurchases in emerging markets during periods of heightened firm-specific and systemic margin call risk and impending liquidation of share-loan pledges.