Document Type
Journal Article
Publication Title
PLoS ONE
Volume
19
Issue
7
PubMed ID
38980849
Publisher
PLOS
School
School of Business and Law
RAS ID
71606
Abstract
This paper focuses on firms in which insiders pledge their shares as collateral for loans. By investigating a natural experiment—China’s enactment of provisions on share reductions that restrict pledge creditors’ cashing-out behavior—we find that pledging firms exhibited more conservative financial reporting after the implementation than non-pledging firms. This effect was pronounced in firms with a higher ratio of pledged shares, a longer maturation period of the pledged shares, and more concentrated pledge creditors. Additionally, we show that pledging firms increased their accounting conservatism after the shock, leading to a lower risk of margin calls and stock price crashes. The effect on accounting conservatism was stronger in firms with controlling pledgers or when the pledge creditors were banks. Our results remained consistent after we performed several robustness tests. These behaviors are economically logical because the provisions heighten creditors’ liquidity risk and the potential losses of loan default. Pledging shareholders embrace more accounting conservatism to mitigate creditors’ concerns about agency costs and avoid triggering margin calls. Our findings provide direct support that creditors have a real demand for accounting conservatism and highlight the impact of shareholder-creditor conflicts on the financial reporting policies of pledging firms.
DOI
10.1371/journal.pone.0306899
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 License.
Comments
Wang, X., Sun, Y., Li, Y., & Zhang, C. (2024). Share pledge and accounting conservatism in share-pledging firms: Evidence from a natural experiment in China. PloS one, 19(7), e0306899. https://doi.org/10.1371/journal.pone.0306899