The effects of promoter share pledging on stock price crash risk and financial performance: empirical evidence from India
Journal of Advances in Management Research
ISSN: 0972-7981
Article publication date: 20 February 2024
Issue publication date: 19 April 2024
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
:Emerald Publishing Limited
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