This study examines how reforms aimed at strengthening creditor rights can have unintended capital market consequences by reshaping investor perceptions and increasing crash risk in firms with controlling shareholder (i.e. promoter) pledging. Exploiting the passage of the Insolvency and Bankruptcy Code (IBC) in 2016 in India as a quasi-natural experiment, we document that pledging activity did not significantly impact crash risk prior to the reform, suggesting that its positive signaling effect offset concerns of bad news hoarding. However, after IBC, the heightened risk of creditor enforcement exacerbated the crash risk in pledging firms. This effect is driven by declines in promoter ownership and heightened investor disagreements over the credibility of pledging as a positive signal and is most pronounced in firms with high pledging intensity. Further, dividend payments mitigate the effect by signaling reduced risk of control loss and alleviating investor disagreements. Therefore, pledging firms are affected not only by regulations directly governing pledging, but also by reforms affecting creditor rights. Overall, this study highlights how reforms intended to reduce information asymmetry and enhance monitoring can inadvertently elevate crash risk, underscoring the importance of market mechanisms in shaping such outcomes.