Share pledging: Measuring margin call pressure and its influence on liquidity commonality

While share pledging is a widespread leveraged financing practice in global stock markets, its potential impact on firms' exposure to market risk remains a topic of concern. In the context of the Chinese market, this study investigates the relationship between insiders' share pledging pressure and stock liquidity risk, with a particular focus on stock liquidity commonality. Using data from Chinese firms listed between 2009 and 2022, we find a positive correlation between heightened share pledging pressure and increased stock liquidity commonality. To precisely capture the margin call pressure arising from share pledging, we introduce an innovative method that considers both the price at which shares are pledged and their subsequent price dynamics. This relationship persists after addressing endogeneity concerns. Furthermore, we find that firms under significant share pledging pressure often resort to earnings manipulation, which exacerbates stock liquidity commonality. The findings underscore the significance of understanding the risks and impacts of share pledging in terms of liquidity risk. Insiders who utilize share pledging as a financing channel face a delicate balance between the benefits of expanded funding sources and the risks of losing control due to sustained stock price declines. This study provides valuable insights for investors, policymakers, and regulatory authorities in managing the potential liquidity risks associated with share pledging activities in the Chinese market.