Does controlling shareholders’ share pledge exacerbate excessive financialization of enterprises?—Evidence from performance pressure perspective

Abstract

Based on the perspective of performance pressure, we explore the influence of controlling shareholders’ share pledge on excessive financialization behavior of enterprises and its internal mechanism. The results show that the share pledge of controlling shareholders is positively correlated with the excessive financialization behavior of enterprises. After the controlling shareholder’s share pledge, the actual performance of the enterprise is lower than expected, causing the short-sighted behavior of the management, which makes the management willing to conspire with the controlling shareholder to cause the excessive financialization of the enterprise. The results are especially evident among the uncertainty of economic policy is low, the industry competition is not fierce and the executives have overseas experience.

Equity pledge of controlling shareholders and investment structure

“…The risk of potential loss of control brought by an equity pledge reduces the risk tolerance of decision-makers. Moreover, Xie, Wang, Zhang, and Wang (2023) and Tian, Tang, Liu, and Qi (2024) provide empirical evidence that equity pledges exacerbate corporate financialization.…”

Share pledge and accounting conservatism in share-pledging firms: Evidence from a natural experiment in China

“…This forced sale can lead to the loss of firm control for controlling shareholders. To maintain their control rights, controlling shareholders may adopt opportunistic measures to elevate stock prices, including share repurchases [ 33 , 34 ], reductions in future innovation activities [ 44 , 45 ] and excessive financialization behavior [ 35 ]. Share pledging also has a negative impact on firms’ reporting quality: Insiders who pledge shares are incentivized to conceal negative news, make positive financing reports or manipulate earnings to elevate stock prices [ 3 , 4 , 6 , 7 ].…”

“…Due to the separation of ownership and control rights, pledging shareholders engage in expropriation at the expense of minority shareholders [ 30 – 32 ]. In order to maintain their control rights, controlling shareholders adopt opportunistic measures after share pledging to elevate stock prices and avoid forced sales [ 33 – 35 ]. However, the literature has yet to explore whether pledge creditors play a role in influencing the behavior of pledging shareholders.…”