Description:
This study details an investigation of the relationship between controlling shareholders’ share pledge and (a) firms’ financial leverage and (b) the cost of debt. Consistent with the literature suggesting that firms with controlling shareholders pledging their shares are associated with greater information asymmetry, we find that controlling shareholders’ pledging activity is positively related to a firm’s total debt ratio and cost of debt. Further analyses show that better corporate governance and more firm transparency can alleviate these agency costs. The results are robust to a number of alternative measures of the share pledging, and after control of endogeneity issues using an instrumental variable and propensity score matching approach. Overall, this study provides support for the pecking order theory and proposes that controlling shareholders’ share pledge is an additional determinant of a firm’s capital structure and cost of capital