Shareholder wealth consequences of insider pledging of company stock as collateral for personal loans

Ying Dou, Ronald W. Masulis, Jason Zein

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We study a widespread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
Original languageEnglish
Number of pages65
JournalReview of Financial Studies
DOIs
Publication statusAccepted/In press - 15 Mar 2019

Cite this

@article{10c48736a7d14a418d2851933cf7c44d,
title = "Shareholder wealth consequences of insider pledging of company stock as collateral for personal loans",
abstract = "We study a widespread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.",
author = "Ying Dou and Masulis, {Ronald W.} and Jason Zein",
year = "2019",
month = "3",
day = "15",
doi = "10.1093/rfs/hhz034",
language = "English",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",

}

Shareholder wealth consequences of insider pledging of company stock as collateral for personal loans. / Dou, Ying; Masulis, Ronald W.; Zein, Jason.

In: Review of Financial Studies, 15.03.2019.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Shareholder wealth consequences of insider pledging of company stock as collateral for personal loans

AU - Dou, Ying

AU - Masulis, Ronald W.

AU - Zein, Jason

PY - 2019/3/15

Y1 - 2019/3/15

N2 - We study a widespread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.

AB - We study a widespread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.

U2 - 10.1093/rfs/hhz034

DO - 10.1093/rfs/hhz034

M3 - Article

JO - Review of Financial Studies

JF - Review of Financial Studies

SN - 0893-9454

ER -