Share Pledges and Margin Call Pressure

61 Pages Posted: 27 Aug 2018 Last revised: 13 Jan 2021

See all articles by Konan Chan

Konan Chan

National Chengchi Unversity (NCCU) - Finance

Hung-Kun Chen

Tamkang University - Department of Banking and Finance

Shing-yang Hu

National Taiwan University - Department of Finance

Yu-Jane Liu

Peking University - Guanghua School of Management

Date Written: July 28, 2018

Abstract

It is common practice worldwide for corporate insiders to put up stock as collateral for personal loans. We highlight a potential problem in such pledging. When controlling shareholders face a margin call threat if stock prices fall below the required level for a loan, they have an incentive to use corporate resources for their private benefit. We develop and test a margin call hypothesis that controlling shareholders may initiate share repurchases to fend off potential margin calls associated with pledged stocks in order to maintain their control rights. Investors seem to recognize such behavior and discount the potential benefits of repurchase programs. However, share pledges are not reliably related to repurchases when control rights are not a concern. We further show that regulatory restrictions of control rights on pledging effectively reduce the likelihood of firms’ repurchasing. Overall, our results shed light on the impact of share pledges on corporate decisions.

Keywords: share pledges, margin call, repurchases, control right, controlling shareholders, self-serving

JEL Classification: G18, G30, G35

Suggested Citation

Chan, Konan and Chen, Hung-Kun and Hu, Shing-yang and Liu, Yu-Jane, Share Pledges and Margin Call Pressure (July 28, 2018). Journal of Corporate Finance, Vol. 52, 2018, Available at SSRN: https://ssrn.com/abstract=3228608 or http://dx.doi.org/10.2139/ssrn.3228608

Konan Chan

National Chengchi Unversity (NCCU) - Finance ( email )

No. 64, Chih-Nan Road
Section 2
Taipei, 11623
Taiwan
+886-2-29393091 ext 81239 (Phone)

Hung-Kun Chen (Contact Author)

Tamkang University - Department of Banking and Finance ( email )

No.151, Yingzhuan Rd. Tamsui Dist.
Taiwan, New Taipei 25137
Taiwan
+886-922140963 (Phone)

Shing-yang Hu

National Taiwan University - Department of Finance ( email )

Room 715, School of Management
85, Sec. 4, Roosevelt Rd.
Taipei
Taiwan
+886 2 33661085 (Phone)
+886 2 23661299 (Fax)

Yu-Jane Liu

Peking University - Guanghua School of Management ( email )

Beijing
China

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