This paper investigates the information content of insider pledging and the forced sale of pledged shares using U.S. data. Contrary to warnings from proxy advisors and the media about insider pledging and suggestions for its prohibition, our findings show that insider pledging announcements do not negatively impact shareholder wealth. Firms with insider pledging experience positive one-year abnormal stock returns and higher future profitability after the disclosure of pledging, indicating that insider pledging signals a firm's better growth prospects. These positive abnormal returns observed after the disclosure of insider pledging are more pronounced in firms with better corporate governance and are associated with pledging by certain insiders with superior information. In addition, we find that the stock price does not significantly decline following the forced sale of pledged shares, indicating that the forced sale does not pose downside risks for shareholders. Overall, our results suggest that insider pledging is not detrimental to shareholder value in the U.S., contrary to findings reported in the literature on emerging markets.

It is common practice worldwide for corporate insiders to put up stock as collateral for personal loans. We highlight a potential problem in such pledging. When controlling shareholders face a margin call threat if stock prices fall below the required level for a loan, they have an incentive to use corporate resources for their private benefit. We develop and test a margin call hypothesis that controlling shareholders may initiate share repurchases to fend off potential margin calls associated with pledged stocks in order to maintain their control rights. Investors seem to recognize such behavior and discount the potential benefits of repurchase programs. However, share pledges are not reliably related to repurchases when control rights are not a concern. We further show that regulatory restrictions of control rights on pledging effectively reduce the likelihood of firms' repurchasing. Overall, our results shed light on the impact of share pledges on corporate decisions.