Insiders Share Pledging, Legislative Change, and Corporate Cash Holdings—Evidence from Taiwan Stocks Market

• In Event: Investor Protection and Decision-Making

Abstract

The study examines how insiders share pledging affects corporate cash holding decision. Note that the passage of the 2011 Company Act amendment in Taiwan, which prohibits the exercise of voting rights of “excessive pledged shares” on election in the general shareholders meeting, provides better investor protection. We further examine whether this legislative change impacts the relationship between insiders share pledging and the firm’s cash holding decisions. The empirical results document that firms with insiders share pledging are negatively associated with cash holding and support the insiders’ agency concern perspective. Further evidence reveals that this result is enhanced after the passage of the 2011 Company Act amendment, suggesting that legislative change triggers insiders’ reducing agency conflicts so that firms with insiders share pledging actually decreases cash holding. This study performs several diagnostic tests and shows the results are robust in various specifications.

Authors

• Ching-Lung Chen, National Yunlin University of Science and Technology

• Chao-Jung Pan, National Yunlin University of Science and Technology

• ChungMin Ho, National Yunlin University of Science and Technology

• Shi-Ming Huang, National Chung Cheng University