Author: Jie Zhang, Associate Professor of Finance, Trent University

Share pledging, where corporate insiders uses shares as collateral for personal loans, has been at the heart of several high-profile corporate scandals in recent years. One of the most notorious cases was the 2002 WorldCom accounting fraud scandal. From 1999 to 2002, the U.S.-based telecom company inflated profits to maintain its stock price. The scandal was largely driven by the former CEO Bernard Ebbers’ attempts to avoid costly margin calls on his pledged shares. A similar scenario unfolded in China when Leshi Internet Information and Technology and its founder, Jia Yueting, were fined US$73.6 million for financial fraud committed from…