The impacts of share pledging on firm investment timing and valuation

Mingfeng He, Dengshi Huang and Jianan Zhou

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: This paper applies a model in the real options framework to analyze the impacts of controlling shareholder’s share pledging on corporate investment timing and valuation. We find that the optimal investment timing shows an inverted U-shape with the pledge ratio, indicating that share pledging exacerbates firms’ over-investment and worsens firms’ under-investment. Furthermore, share pledging hurts firms’ option value unless active measures are taken to control the pledging risks. The maintenance requirement can keep controlling shareholder from irrational early investments and protect investors from severe wealth losses. In addition, our work can provide testable empirical implications.

Keywords: Share pledging; Real options; Investment timing; Inverted U-shape; Empirical implications (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s105752192300087x

DOI: 10.1016/j.irfa.2023.102571

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