Share-pledging and the cost of debt

Document Type

Article

Publication Date

2021

Abstract

We examine how corporate insiders pledging their equity stakes to collateralise personal loans influences firm cost of debt. Pledging enables managers to diversify personal holdings, potentially increasing risk-taking incentives. However, exposure to contingent risks creates potentially stronger risk-reducing incentives. Using hand-collected data with OLS, difference-in-differences, and instrumental variables models, we find significant decreases in yield spreads associated with executive share-pledging. Reductions in spreads surrounding share-pledge disclosures suggest investors update their risk assessment to reflect pledging managers’ risk-taking incentives. Consistent with risk-reducing incentives, firms with share-pledging executives subsequently reduce leverage.

Comments

Copyright 2020 Accounting and Finance Association of Australia and New Zealand.

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Publication Title

Accounting & Finance

Published Citation

Puleo, Michael, Michael McDonald, and Steven Kozlowski. "Share‐pledging and the cost of debt." Accounting & Finance 61, no. 1 (2021): 1047-1079. https://doi.org/10.1111/acfi.12603

DOI

10.1111/acfi.12603

Peer Reviewed

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