Financing the firm or fueling risk? how share-pledged loans for corporate use shape corporate performance

Abstract

This paper investigates the effects of controlling shareholders’ share pledges on the performance of Chinese publicly listed companies between 2009 and 2022. Utilizing a triple difference-in-difference approach, we explore how the act of controlling shareholders pledging their shares and reinvesting the proceeds into the firm impacts both short-term accounting outcomes and long-term firm value. Our findings show that while such pledges tend to enhance short-term accounting performance, as measured by return on equity (ROE), they correlate with a reduction in the firm’s long-term value, as reflected by TobinQ. This trend persists even when alternative proxies for ROE and TobinQ are used, and remains robust across different sample sets and when employing propensity score matching. Furthermore, we observe that these effects are more pronounced in firms where controlling shareholders exhibit a significant gap between cash flow rights and voting rights, or where tunneling activities are prevalent, or corporates with lower analysts following. Our study contributes to the literature on share pledging and reinforces the agency theory framework regarding the actions of controlling shareholders.