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Share‐pledging and the cost of debt

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  • Michael Puleo
  • Michael McDonald
  • Steven Kozlowski

Abstract

We examine how corporate insiders pledging their equity stakes to collateralise personal loans influences firm cost of debt. Pledging enables managers to diversify personal holdings, potentially increasing risk‐taking incentives. However, exposure to contingent risks creates potentially stronger risk‐reducing incentives. Using hand‐collected data with OLS, difference‐in‐differences, and instrumental variables models, we find significant decreases in yield spreads associated with executive share‐pledging. Reductions in spreads surrounding share‐pledge disclosures suggest investors update their risk assessment to reflect pledging managers’ risk‐taking incentives. Consistent with risk‐reducing incentives, firms with share‐pledging executives subsequently reduce leverage.

Suggested Citation

  • Michael Puleo & Michael McDonald & Steven Kozlowski, 2021. "Share‐pledging and the cost of debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 1047-1079, March.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:1:p:1047-1079
    DOI: 10.1111/acfi.12603
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    References listed on IDEAS

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    Cited by:

    1. Zhou, Jingting & Li, Wanli & Yan, Ziqiao & Lyu, Huaili, 2021. "Controlling shareholder share pledging and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 77(C).
    2. Li, Yukun & Zhu, Danfeng, 2022. "Share pledging and corporate environmental investment," Finance Research Letters, Elsevier, vol. 50(C).
    3. Liu, Wei & Tian, Gary Gang, 2022. "Controlling shareholder share pledging and the cost of equity capital: Evidence from China," The British Accounting Review, Elsevier, vol. 54(6).

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