Controlling shareholder’s share pledging and annual report tone management: empirical evidence from Chinese listed firms

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This study explores the effects of share pledging on corporate tone management. We find that firms with high levels of pledging by controlling shareholders are more likely to adjust the tone of texts in their annual reports, with this effect remaining unchanged even after controlling for potential endogenous factors. Additionally, we observe that this positive association is more pronounced when the risk of control transfer is high and when the firm’s information has garnered increased attention. Furthermore, we observe that investors positively respond to tone management in the short term. Finally, our findings indicate that controlling shareholders manipulate other disclosures (i.e. earnings management, risk factor disclosures, and text readability) to complement tone management. Overall, our findings underscore that controlling shareholders are incentivized to mitigate the risk of control right transfer by influencing the tone of firms’ annual reports.