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Stock Pledge Ratio Limit and Stock Market Stability: A Natural Experiment Based on the Regulation of Stock Pledge

【Authors】
XIONG Haifang, TAN Yuanyue, WANG Zhiqiang
【WorkUnit】
Dongbei University of Financial and Economics, 116025.
【Abstract】

Stock pledge will pose great risks to the stock market, so will limiting the stock pledge ratio stabilize the stock market? Based on the quasi-natural experiment of pledge ratio limit, this paper explores the influence of pledge ratio limit on the stock return, stock volatility, illiquidity and the proportion of trading suspension days via propensity score matching (PSM) and Differences-in-Differences model. In order to get a full picture of how the limit influences the stock market, we conduct mechanism analysis based on corporate governance and shareholders' behavior. Furthermore, we consider the spillover effect on firms with a low stock pledge ratio. The results are: in short term, the limit has negative impact on stock return and liquidity while positive impact on stock volatility. The regulation has more negative sway on the stock return of firms facing greater risk of corporate control transfer and on the liquidity of firms at less risk. Although the targets of the regulation are firms with the stock pledge ratio over 50%, the regulation also has spillover effect on firms with a low stock pledge ratio. The impact of the regulation is felt by the stock market via earnings management and shareholders' trading. Therefore we should keep a close eye on earnings management and shareholders' trading to guard against the risk spread caused by the spillover effect.

 

JEL: G32, G38

【KeyWords】
Stock Pledge, Market Stability, Difference-in-Differences, Spillover Effect