Share pledge and stock repurchase: The role of stock mispricing and corporate governance

Abstract

Prior research documents a positive relation between controlling shareholders' share pledge and the probability of a stock repurchase announcement. This study investigates whether and how stock mispricing and corporate governance affect this relation. By extending the framework of Chan et al. (2018), we first show that the share pledge is not only positively related to the probability of stock repurchase but also proportionally related to the amount purchased. Moreover, for firms with shares pledged by controlling shareholders, stock overpricing and better firm-level corporate governance are associated with a lower probability of stock repurchase and less amount of stock repurchase. Additional tests show that large shareholders (not only the largest) facilitate stock repurchase once they have shares pledged. Our evidence supports the market timing theory and that better corporate governance moderates the agency problem between controlling and small shareholders.