Is pledge risk matched between pledgees and pledgers in China's share pledge market?

Based on a sample of share pledging by the controlling shareholders of A-share listed firms,we investigate whether pledge risk is matched between pledgees and pledgers in China’s share pledge market.The results show that,compared with broker pledgees,commercial bank pledgees accept pledged stocks with lower market risk and the corresponding listed firms are at lower risk,have higher levels of information transparency and are more likely to be stateowned enterprises(SOEs).We also find that commercial bank pledgees do not ease the risk requirement of pledged stocks for pledgers of SOEs.Further,we document that commercial bank pledgees face lower margin call risks than broker pledgees.After securities companies were authorized to compete in the share pledge market in 2013,the pledge risk faced by commercial bank pledgees further reduced.Our results support that China’s share pledge financing market generally achieves an efficient equilibrium in terms of pledge risk matching between pledgees and pledgers.We recommend that the macro control of share pledge risk be focused on broker pledgees.

Pledgee competition, strategic disclosure, and future crash risk

We investigate whether pledgee competition affects the disclosure choice of firms whose controlling shareholders pledge their shares.We find that pledgee competition is positively related to pledge firms’ annual report tone management.This positive relationship is stronger for pledge firms with lower credit quality and non-state-owned enterprise pledge firms.Further corroborating our results, higher pledgee competition increases the future crash risk of pledge firms.Collectively, our results suggest that competition pressure induces pledgees to lower their monitoring incentives to remain competitive in the marketplace, thus leading to pledge firms’ bad news hoarding behavior.