The motivations and influencing factors of share pledging: An analysis of pledging and trading strategies

This paper develops a model to investigate the motivations behind controlling shareholders’ share pledges and their determinants. The results show that these motivations hinge on the trade-off between the marginal private gain from pledging and the marginal control benefit from ownership. When pledge funds are reinjected into firms, although aggregate welfare increases, a higher incremental firm profit per pledged share unexpectedly reduces the incentive to pledge shares because of the free-rider problem. When funds are used for personal projects, pledge intensity increases with investment opportunities, financing needs, and loan-to-value ratios; decreases with risk aversion and firm monitoring costs; and is invariant to ownership endowment. Moreover, controlling shareholders may maintain pledges even when social losses exceed private gains, which can lead to socially wasteful outcomes, and sufficiently large private benefits per pledged share can even trigger full pledging. To address these issues, authorities, firms and shareholders should effectively disclose the use of pledge funds, restrict the voting rights of pledged shares, and restructure the benefit-distribution and risk-sharing mechanisms associated with reinvesting pledge funds into firms.