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Asymmetric information and opportunism in insider share-pledging

Michael R. Puleo (Department of Finance, Fairfield University, Fairfield, Connecticut, USA)
Steven E. Kozlowski (Department of Finance, Fairfield University, Fairfield, Connecticut, USA)

Managerial Finance

ISSN: 0307-4358

Article publication date: 29 April 2021

Issue publication date: 4 October 2021

416

Abstract

Purpose

Amid growing attention from investors, regulators and advisory firms in recent years, this study assesses whether managers exploit private information to time share-pledge transactions and extract personal benefits while avoiding unintended market scrutiny.

Design/methodology/approach

We use hand-collected pledging data for a random sample of S&P 1500 firms to examine whether private information influences insider share-pledging activity using Heckman selection and two-part hurdle models of the pledge decision. We also conduct an event study analysis of announcement returns to measure market reactions to pledging news and determine whether share-pledge disclosures affect investor risk assessments.

Findings

Consistent with insiders timing pledges prior to anticipated performance declines, both the likelihood and level of pledging increase significantly with negative earnings surprises. New share-pledges precede significant decreases in abnormal returns, and public announcement of new pledging corresponds with significant negative cumulative abnormal returns. The evidence suggests that insiders exploit private information to time pledges, and that investors update risk assessments and value estimates based on information conveyed by these transactions.

Practical implications

Our findings hold important implications for governance and regulation of pledged shares, indicating that permissive reporting requirements in the US facilitate informed pledging and may undermine incentive alignment between managers and shareholders. The analysis promotes transaction-specific disclosures and transparent corporate policies for insider share-pledging.

Originality/value

Ours is among the first empirical analyses of share-pledging in US firms and the first to examine the role of private information in pledging decisions. We offer novel evidence on the opportunistic use of pledged shares and provide insight to predictors of share-pledging behavior.

Keywords

Acknowledgements

The authors are truly grateful to an anonymous reviewer and to the editor for invaluable comments and guidance on the paper.

Citation

Puleo, M.R. and Kozlowski, S.E. (2021), "Asymmetric information and opportunism in insider share-pledging", Managerial Finance, Vol. 47 No. 10, pp. 1385-1407. https://doi.org/10.1108/MF-06-2020-0322

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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