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The effects of promoter share pledging on stock price crash risk and financial performance: empirical evidence from India

Ankita Kalia (University Business School, Panjab University, Chandigarh, India)

Journal of Advances in Management Research

ISSN: 0972-7981

Article publication date: 20 February 2024

Issue publication date: 19 April 2024

87

Abstract

Purpose

Despite the widespread prevalence of share pledging by Indian promoters, this area remains out of the researchers’ purview. This study aims to bridge this research gap by delineating the impact of promoter share pledging on future stock price crash risk and financial performance in India.

Design/methodology/approach

A sample of 257 companies listed on the Standard and Poor’s Bombay Stock Exchange 500 (S&P BSE 500) Index has been analysed using panel (fixed-effects) data regression methodology over 2011–2020. Further, alternative proxies for crash risk and financial performance are adopted to ensure that the study’s initial findings are robust. Finally, the instrumental variable with the two-stage least squares (IV-2SLS) method has also been employed to alleviate endogeneity concerns.

Findings

The results suggest a significantly positive relationship between promoter share pledging and future stock price crash risk in India. Conversely, this association is significantly negative for future financial performance. Moreover, the results hold, even after including alternative proxies of stock price crash risk and financial performance and addressing endogeneity concerns.

Originality/value

Owing to the sizeable equity shareholdings of the promoters, share pledging has remained a lucrative source of finance in India. Despite the popularity, the findings of this study question the relevance of share pledging by Indian promoters considering its impact on aggravating future stock price crash risk and deteriorating future financial performance.

Keywords

Acknowledgements

The author would like to thank Prof. Surendra S. Yadav (Editor-in-Chief), Prof. Ravi Shankar (Executive Editor) and anonymous reviewers for their helpful and constructive comments.

Citation

Kalia, A. (2024), "The effects of promoter share pledging on stock price crash risk and financial performance: empirical evidence from India", Journal of Advances in Management Research, Vol. 21 No. 2, pp. 290-310. https://doi.org/10.1108/JAMR-01-2023-0003

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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