The Unintended Effects of Stock Pledging: A Perspective on the Shareholder–Creditor Conflict*

This paper examines whether and how stock pledging by a firm's largest shareholder affects the conflict of interest between shareholders and creditors. We find such stock pledging is negatively associated with corporate risk-taking. This association is more pronounced for companies with high debt costs before such pledging, with dominant controlling shareholders, and those whose largest shareholders  borrow from small lenders. Further, we find firms subject to such pledging are more likely to be granted new private loans and exhibit greater investment efficiency. Overall, stock pledging by a firm's largest shareholder unintentionally mitigates the shareholder–creditor conflict by reducing corporations' pursuit of risky investments.