The Causes and Consequences of Stock Pledging by Controlling Shareholders: The Case of Taiwan

The information of pledging stocks for liquidity by controlling shareholders of publicly traded firms in Taiwan has been required to disclose since 1998. A common perception by market practitioners in Taiwan is that stock pledging by controlling shareholders is an indication of expropriation of firms. This study first examines the determinants of the tendency that controlling shareholders of firms in Taiwan pledge their stocks to financial institutions for liquidity and then evaluates how stock pledging by controlling shareholders affects their firms' accounting and financial performances. Determinants of firm attributes, market conditions, and corporate governance are identified. The tendency of stock pledging by controlling shareholders has a negative effect on accounting and financial performances. The negative effect on firm performance is reduced when the firm has a higher level of working capital. These findings indicate that stock pledging by controlling shareholders is an indication of weak corporate governance when the firm has lower liquidity. These findings may provide insights to the equity markets of the other countries in which public firms have more concentrated ownerships.