A Study of Controlling Shareholders’ Equity Pledge Rate Based on Dividend Policy and Barrier Option

This paper investigates the implied barrier option characteristics of controlling shareholders’ equity pledge loans and establishes a pricing model for the equity pledge rate that simultaneously considers the down-and-in put implied barrier option and the dividend policy. Meanwhile, the pricing model is used to empirically calculate the equity pledge rates of A-share listed companies in China from the viewpoint of application. The findings are as follows. (i) The probability of the pledged stock price falling below the closing line increases monotonically about the equity pledge rate, and the probability of the stock price falling below the closing line is higher under a fixed dividend policy than the corresponding probability under a fixed dividend yield policy. (ii) The equity pledge rate has an inverse relationship with the loan maturity and volatility. (iii) The equity pledge rate on controlling shareholders’ equity pledges varies in the same direction as the loan interest rate. (iv) The relationship between the change in the equity pledge rate level and the fixed dividend is affected by the merits of the firm’s performance. The equity pledge rate level has an inverse variation relationship with the fixed dividend yield.