Disagreement Motivated Trading: The Bright Side of Share Pledges

We study the impact on stock liquidity of share pledges by controlling shareholders. Using 2SLS and a regulatory change that exogenously increases pledging activities, we document a positive causal link between pledging and stock liquidity. These baseline results are robust to a variety of tests using alternative data frequency, variable definitions, model specifications, and sample selection. Further, we find that the channel of dispersion of opinions among investors explains the findings. In further discussion, our study finds that share pledging is also associated with lower liquidity risk. Our empirical findings contradict the regulatory concern that share pledges by controlling shareholders will deteriorate the company's information environment.

Automated summary

This study examines the impact of share pledges by controlling shareholders on stock liquidity. Using 2SLS and an exogenous regulatory change, we find a positive causal link between pledging and stock liquidity. Our results are robust to various tests and we find that dispersion of opinions among investors explains the findings. Additionally, our study shows that share pledging is associated with lower liquidity risk, contradicting regulatory concerns about its negative impact on the company's information environment.