Before thrive, first survive: The impact of controlling shareholder pledging on corporate ESG performance

Abstract

This paper investigates the impact of controlling shareholder pledging on corporate environmental, social, and governance (ESG) performance. Using data from Chinese listed firms, we show that controlling shareholder pledging significantly weakens firms' ESG performance and that this effect is robust to endogeneity and the choice of ESG metrics and controlling shareholder pledging measures. In addition, we show that the main channel through which ESG performance deteriorates for firms with controlling shareholder pledging is the risk of losing control. The adverse impact of controlling shareholder pledging on ESG is much less when control rights are not at risk. On the other hand, limited resources (e.g. tunnelling and financial constraints) contribute little to the impact. Our further analyses demonstrate that internal monitoring mechanisms can mitigate the negative impact of controlling shareholder pledging on corporate ESG performance, but external monitoring mechanisms cannot.