Controlling shareholders’ equity pledges, earnings management and firms’ investment in innovation–evidence from China’s A-share listed companies

This paper intends to investigate the impact of controlling shareholders’ equity pledges on firms’ innovation investment from the perspective of earnings management. Based on the multiple linear regression model, this study takes China’s A-share listed companies as samples, combines the testing procedures of mediation and moderating effects, develops the empirical analysis of the hypotheses, and conducts the endogeneity test and robustness analysis. The results show that: (i) Controlling shareholders who make equity pledges will engage in real earnings management, leading to a reduction in the firm’s investment in innovation indirectly. (ii) Controlling shareholders’ equity pledge behavior will have a direct inhibitory effect on firms’ innovation investment, and the degree of direct inhibition increases with the pledge ratio. (iii) Controlling shareholders’ equity pledges under financing constraints will strengthen the accrued earnings management and indirectly increase the capitalization ratio of the firms’ R&D investment.