An Investigation of Firm Value, Ownership Structure and Stock Pledging Behavior of Financially Distressed Companies

• Main Authors: Minling Liao, 廖敏齡
• Other Authors: Chwen-Ming Chang
• Format: Others
• Language: en_US
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/9dfc9v

博士 === 長榮大學 === 經營管理研究所 === 98 === This study examines the relationships among firm value, ownership structure and stock pledging behavior of financially distressed companies by using a simultaneous equation model. There is substantial agency-theory research on the relationship between firm value and managerial ownership. This research indicates that managerial ownership has a significant influence on firm value and vice versa. In contrast, some previous studies (e.g. Jensen and Meckling, 1976; Cho, 1998) have proof that firm value and ownership exist as non-monotonic relations. In any case, an ownership structure analysis requires an explicit consideration of the frictions occurring in capital markets. Whenever the assumption of healthy capital markets is relaxed, taxes, bankruptcy and transaction costs as well as agency problems become relevant in such a way that ownership and control structure come to play an important role. In this framework it is widely accepted that firm market value is not only the result of firm investment projects, but also depends on some other corporate activities, such as financial structure, dividend policy and financing policy. Most Taiwanese listed companies have a concentrated ownership, which can influence the process of decision making as well as financing policy. Control ownerships pledge their shares in the capital market to get the necessary funds, but retain the power of control over the company. Consequently, this financing behavior impacts the company’s capital stock. Lee and Yeh (2004) assert that the stock pledge of shareholders is significantly associated with firm value in financially distressed companies. However, there is no research investigating the relationships among firm value, ownership and stock pledge. Research may infer a biased conclusion if the study does not carefully consider causality. Therefore, this paper argues that these three factors are influenced simultaneously in financially distressed companies. This study uses a simultaneous equation model which treats firm value, managerial ownership and stock pledge as endogenous. The evidence supports the hypothesis that firm value, managerial ownership and the stock pledge of insiders impact each other simultaneously in financially distressed companies, i.e., firm value is positively impacted by managerial ownership but negatively impacted by the stock pledge of insiders; managerial ownership is positively impacted by firm value but negatively impacted by stock pledge of insiders; stock pledge of insiders is negatively impacted by firm value and managerial ownership. Further investigations are made to compare results between financially distressed companies and healthy companies. The findings indicate that firm value is important determinant of managerial shareholdings in both distressed and healthy companies. In addition, insiders pledging their shares in distressed companies has a severe impact on the firm’s stock price, in turn a firm’s value, a situation that does not occur in a healthy company. Finally, some governance variables (e.g., independent board directors and institutional ownership) enhance external monitor mechanism to prevent financial distress. The results of this study indicate that ignoring the web of these relationships will lead to incorrect inferences. Therefore, causes and effects cannot be completely understood without incorporating the endogenous issue.