Multiple Large Shareholders and Controlling Shareholders' Equity Pledging

ABSTRACT Controlling shareholders essentially engage in equity pledging with the goal of promoting their own self‐interest, but few studies have explored the mechanisms that can restrict this activity. By reference to a sample of Chinese firms listed on the Shanghai and Shenzhen A‐share markets from 2007 to 2022, we find evidence indicating that the presence of active multiple large shareholders has a significant constraining effect on controlling shareholders' equity pledging. Furthermore, we conduct deep analyses of this situation in terms of its timing, path and economic consequences. Specifically, the timing analysis reveals that active multiple large shareholders can moderate the equity pledging on the part of controlling shareholders that results from the separation between cash flow and control rights as well as excess goodwill. The path analysis reveals that active multiple large shareholders can decrease controlling shareholders' equity pledging by motivating management and reducing press coverage. Finally, the economic consequence analysis reveals that active multiple large shareholders can decrease tunnelling among controlling shareholders and reduce the risk of future stock price crashes resulting from equity pledging.