Abstract
We examine the impact of share pledging (SP) on a firm’s innovation using a sample of Chinese firms. Our findings show that when controlling shareholders pledged their shares in personal loans, their firm’s innovation decreases. Our findings are robust for alternative metrics of innovation and SP. Additional analyses suggest that when controlling shareholders have little ownership or stock price volatility is high, the impact of SP on corporate innovation magnifies, presumably due to the high margin call risk of share against the pledged controlling shareholders. Overall, our study shows that the self-interest of controlling shareholders with pledged shares impedes corporate innovation, thereby impeding the sustainable development of society.
Highlights
Share pledging (SP) refers to a scenario in which one or more controlling shareholders use their shares as collateral in their personal loans
We report the descriptive statistics of all variables in Panel A of Table 1
We examine the impact of SP on corporate innovation using a sample of Chinese firms
Summary
Share pledging (SP) refers to a scenario in which one or more controlling shareholders use their shares as collateral in their personal loans. Controlling shareholders will post additional margin and/or lose controlling rights of the firm, when the stock price meets the margin call. As a result, they are likely to place pressure on managers to boost the stock price and/or minimize decreases in the stock price for self-interest. Share pledged shareholders conduct unethical behavior for self-interest at the expense of minority shareholders, which hurts firm value. Some of these unethical behaviors hinder firms to engage in activities, which can bring long-run benefits to firms and society, thereby impeding the sustainable development of a country
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