Share Pledging and Corporate Securities Fraud

We examine the effect of insider share pledges on corporate fraud. We find a positive, causal relation between share pledges by controlling shareholders and detected corporate fraud. Firms whose controlling shareholders pledge have longer fraud detection cycles and receive lighter punishments. Firms with pledging controlling shareholders who hold pledging contracts with multiple financial institutions or continuous pledge commitments that exceed three years are more like to commit fraud. We examine two economic mechanisms through which firms with pledging controlling shareholders are more likely to commit detected fraud. Our baseline results are robust to bank monitoring and share repurchases, and to the use of difference-in-differences, instrumental variables, and two types of covariate balancing. Our paper quantifies the real effects of a widespread yet under-explored corporate governance phenomenon on detected corporate fraud