Using stock split to secure pledged shares: Evidence from Chinese listed firms

Controlling shareholders who face margin call pressure may initiate stock splits to prop up the stock price in order to secure the pledged shares. We find supporting evidence based on a sample of Chinese listed firms through 2008–2018 where share pledge is prevalent. The findings are robust to various robustness checks, and are stronger for non-SOEs where losing control right is indeed a concern. We further show that controlling shareholders consider investors’ demand for low-priced stocks when initiating stock split to protect pledged shares. Importantly, we propose a new measure for margin call pressure, Distance, which considers both the proportion of shares pledged and the distance between stock price and margin call trigger point. We find margin call pressure starts to impact stock split as Distance approaches 160%, a trigger level commonly-used in industry. Investors react less favorably to split announcement when controlling shareholders face high margin call pressure.