Can common institutional ownership constrain the equity pledges of controlling shareholders? Evidence from Chinese listed companies

Abstract

The potential risks associated with controlling shareholders' equity pledges pose significant challenges to capital market stability and development. Therefore, effective mechanisms to constrain equity pledges have become a key focus of scholarly investigation. This study examines the impact of common institutional ownership on controlling shareholders’ equity-pledging behavior using data from Chinese A-share listed firms between 2010 and 2021. The findings reveal that common institutional ownership significantly reduces equity-pledging activities among controlling shareholders. This relationship is robust across various tests, including the Heckman two-step model and instrumental variable approach. Mechanism analysis suggests that common institutional ownership influences equity pledging mainly through scale effects, board appointments, and exit threats. Moreover, the effect is stronger when long-term independent institutional investors are involved. These findings contribute to the literature by highlighting factors influencing equity pledges and showing how common institutional ownership reduces the risks associated with controlling shareholders' equity pledges.