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Title:Do share pledges by insiders influence firm performance and value?
Author(s):Singh, Pranav
Director of Research:Pennacchi, George
Doctoral Committee Chair(s):Pennacchi, George
Doctoral Committee Member(s):Partnoy, Frank; Wu, Yufeng; Johnson, Timothy
Department / Program:Finance
Degree Granting Institution:University of Illinois at Urbana-Champaign
Subject(s):Share Pledges, Corporate Governance, Corporate Finance
Abstract:The first chapter demonstrates the prevalence and importance of pledging of shares by insiders in the U.S. I create the first comprehensive database of share pledges by insiders in the U.S. to reveal the prevalence of this practice and its role in encouraging earnings management. I find that, during the fiscal years 2006 to 2014, insiders at one of every three S&P1500 firms pledged their ownership in the firm as collateral to obtain loans at least once. I exploit a 2012 market-wide advisory against share pledges by Institutional Shareholder Services, the largest proxy advisory firm, as a quasi-natural experiment. A difference-in-differences estimation reveals that, after the shock, insiders curtailed share pledge activity by approximately 40% and firms with share pledges reduced earnings manipulation by an average 15% of their reported profits. The results suggest that share pledges distort the incentives of insiders and motivate them to inflate earnings. The second chapter segregates the two types of share pledges and shows that they have divergent effects on firm performance and value. Insiders pledge their ownership in the firm to offer collateral for not only their personal loans but also the loans to the firm. Pledging of shares modifies their payoff structure without altering their control rights. This modification in the payoff structure can influence the incentives of controlling shareholders and have real effects on the firm's value and performance. Using hand-collected data from India,I find that share pledges for personal loans reduce the effective ownership of controlling shareholders and destroy firm value. In contrast, share pledges for firm's loans mitigate borrowing constraints for the firm and add value to firms with limited access to debt finance or high growth opportunities. The third and last chapter documents that share pledges by insiders create moral hazards by motivating them to alter the risk-taking ability of firms and encouraging them to avoid reporting small losses. During the years 2009 to 2015, firms in India displayed a higher tendency to avoid reporting small losses by converting them to small profits when their controlling shareholders pledged shares. Share pledges for personal loans and firm's loans have contrasting effects on the aggregate risk-taking ability of firms. Share pledges for personal loans predict a decline in the risk-taking ability of firms over the subsequent year. On the contrary, share pledges for firm's loans may lead to excessive risk-taking.
Issue Date:2019-04-12
Rights Information:Copyright 2019 Pranav Singh
Date Available in IDEALS:2019-08-23
Date Deposited:2019-05

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