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Controlling Shareholder's Equity Pledge and Corporate Investment——From the Perspective of Financial Investment and Real Investment

【Authors】
KE Yanrong, LI Yumin & WU Xiaohui
【WorkUnit】
Xiamen University, 361005.
【Abstract】

Utilizing the semi-annual data of Chinese nonfinancial listed firms during the period of 2007—2017, this paper empirically explores whether the equity pledge by controlling shareholder will affect the investment behavior of the listed firms. This study finds that the equity pledge ratio by controlling shareholder is in a U-shape relationship with the financial investment level of the listed firms, and an inverted U-shape relationship with their real investment level. When the ratio of equity pledge by controlling shareholder is lower than a critical value, the interest between the controlling shareholder and minority shareholders is more consistent, and the transfer of control right is less risky. Therefore, the controlling shareholder will participate in the core business operation of the firm and increase real investment actively. When the ratio of equity pledge by controlling shareholder is higher than a critical value, though the conflict of interest between controlling shareholder and minority shareholders aggravate the motivation of tunneling by controlling shareholder, the risk of control right transfer is more prominent. Therefore, the controlling shareholder has a stronger incentive to maintain the share price and increase financial investment. The results show that the different investment behavior and investment preference of the listed firms under the different ratio of equity pledge by controlling shareholder have non-linear influence on financial investment and real investment. The main conclusion is robust after controlling the endogeneity as much as possible. The further study shows that the U-shape and inverted U-shape relationships are regulated by corporate ownership, the risk of transfer of control rights and the difference of returns on financial assets and operating assets. This study reveals the economic consequences of controlling shareholder's equity pledge in the choice and adjustment of company investment decisions. It provides incremental evidence that controlling shareholders with low pledge ratio are more possible to support listed companies, while controlling shareholders with high pledge ratio are more likely to damage listed companies.
 
JEL: G30, G32, G38

【KeyWords】
Equity Pledge, Financial Investment, Real Investment