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.
Available at: http://works.bepress.com/steven-kozlowski/8/
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