Insider Share-Pledging and Firm Investors

Corporate insiders frequently borrow from lending institutions and pledge personal equity shares as collateral for the loan. Using manually collected pledge data for January 2007-December 2011, I examine how this phenomena affects firm investors and analyze agency conflicts between pledging managers and (a) outside shareholders, and (b) bondholders. Pledging potentially influences investor risk through changing managerial incentives and/or contingency risk from ill-timed margin calls. Findings suggest influential insiders extract private benefits of control at the expense of outside shareholders through pledging. Difference-in-differences regressions utilizing an exogenous shock to lending supply indicate pledging corresponds with a 9.9% relative increase in stock volatility – controlling for changes in fundamentals – and support a causal interpretation of the relation between pledging and equity risk. Despite apparently harming equity investors however, further analysis suggests pledging benefits bondholders, and corresponds with an economically and statistically significant reduction in yield spreads on corporate bonds. Robustness tests evidence reductions in risky financing when insiders pledge, corroborating the negative relation between pledging and cost of debt and consistent with mitigated agency conflicts between managers and bondholders.

Grantor dc:publisher

Temple University. Libraries

Year dc:date.issued

2016

Author dc:creator

• Puleo, Michael

Advisor dc:contributor.advisor

• Anderson, Ronald

Committee members dc:contributor.committeemember

• Naveen, Lalitha
• John, Kose
• Basu, Sudipta, 1965-
• Li, Yan

• Finance
• Economics
• Agency theory
• Corporate ownership
• Cost of debt
• Equity risk
• Pledged shares

Statement dc:rights

• IN COPYRIGHT- This Rights Statement can be used for an Item that is in copyright. Using this statement implies that the organization making this Item available has determined that the Item is in copyright and either is the rights-holder, has obtained permission from the rights-holder(s) to make their Work(s) available, or makes the Item available under an exception or limitation to copyright (including Fair Use) that entitles it to make the Item available.

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Language dc:language.iso

eng

Dc Identifier Other

965642267

OAI identifier oai:identifier

oai:scholarshare.temple.edu:20.500.12613/2195