We study a wide-spread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect.
First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forego private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
This chapter examines dual class common stock. Dual class stock has evolved from a vehicle used largely by insiders in family owned and media companies to...
Larger-than-life corporate leaders, who can move fast and disrupt entrenched players, are often perceived as having the vision, superior leadership,...