Equity pledge and controlling shareholders’ over-appointing of directors

This paper investigates the effect of equity pledge on controlling shareholders' over-appointing of directors. We find that the percentage of shares pledged by the controlling shareholder is positively related to the possibility and the percentage of controlling shareholders' over-appointing of directors, and this positive relationship is less pronounced for SOEs. We then provide evidence to show that the positive effect of equity pledge on controlling shareholders' over-appointing of directors is due to controlling shareholders' desire to reduce the risk of control transfer and to enjoy the private benefits of control. Finally, we find that as the percentage of shares pledged increases, controlling shareholders’ over-appointing of directors leads to higher stock price crash risk and lower firm value in the long run. • Equity pledge is positively related to over-appointing of directors. • This positive relationship is less pronounced for SOEs. • Controlling shareholders tend to reducing control transfer risk and capturing private benefits. • The negative effects of equity pledge are enhanced by over-appointing of directors.