Share‐loan pledging and relaxation of share‐repurchase restrictions in China

Qi Guo, Lawrence Kryzanowski, Mingyang Li and Jie Zhang

Accounting and Finance, 2021, vol. 61, issue 5, 5925-5964

Abstract: We examine a period in which the in‐principle prohibition of share repurchases was relaxed in 2018 to allow for the repurchase of shares whose prices dropped materially or were below book value. We find that share‐loan pledges by controlling shareholders are significantly and positively associated with share repurchases for a sample of 3,531 Chinese firms. This finding is robust using entropy and propensity score matched samples, 2SLS IV regressions, regression discontinuity design (RDD), and two exogenous shocks (the China–US trade war in 2018 and the COVID‐19 pandemic in 2020). The association remains robust but becomes less strong with state ownership and with above industry average firm agency problems, leverage ratios and financial constraints/distress (i.e., other share repurchase motives). Our findings highlight the importance of financial market regulations on share‐loan pledging and share repurchases in emerging markets during periods of heightened firm‐specific and systemic margin call risk and impending liquidation of share‐loan pledges.

Date: 2021
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