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Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment

This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-inve...

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Main Authors: Geng, Huixia, Zhu, Hongbing, Lau, Wei Theng, Razak, Nazrul Hisyam Ab, Nor, Normaziah Mohd
Format: Article
Published: Elsevier 2024
Online Access:http://psasir.upm.edu.my/id/eprint/112100/
https://www.sciencedirect.com/science/article/abs/pii/S0927538X24000921?via%3Dihub
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spelling my.upm.eprints.1121002024-10-23T07:28:14Z http://psasir.upm.edu.my/id/eprint/112100/ Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment Geng, Huixia Zhu, Hongbing Lau, Wei Theng Razak, Nazrul Hisyam Ab Nor, Normaziah Mohd This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-investment degree becomes severer as the pledging percentage increases. In addition, we observe this effect more pronounced in firms characterized by more concentrated ownership structure. Our findings still hold after the endogeneity disposal with a firm-fixed effect regression, Heckman two-stage regression with instrumental variables, the propensity score matching (PSM) and differences-in-differences (DID) approach. Furthermore, we observe that firms with controlling shareholders' share pledging tend to be concerned more with additional investments while neglecting maintenance investments and R&D investments. Combined with the motivation of controlling shareholders to gain substitute cash flow rights and convey good signals to the market, as well as the feasibility by using their dominate voting rights and pledged funds, it properly illustrates the mechanism through which controlling shareholders' share pledging impact over-investment, which meanwhile aggravates the principal-principal (PP) conflicts between controlling shareholders and minority shareholders. Consequently, our findings empirically demonstrate that signaling costs in signaling theory could be explicit conflicts in the agency theory, adding new empirical evidence for the relationship between signaling theory and agency theory. Elsevier 2024 Article PeerReviewed Geng, Huixia and Zhu, Hongbing and Lau, Wei Theng and Razak, Nazrul Hisyam Ab and Nor, Normaziah Mohd (2024) Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment. Pacific Basin Finance Journal, 85. art. no. 102341. ISSN 0927-538X https://www.sciencedirect.com/science/article/abs/pii/S0927538X24000921?via%3Dihub 10.1016/j.pacfin.2024.102341
institution Universiti Putra Malaysia
building UPM Library
collection Institutional Repository
continent Asia
country Malaysia
content_provider Universiti Putra Malaysia
content_source UPM Institutional Repository
url_provider http://psasir.upm.edu.my/
description This paper investigates the relationship between controlling shareholders' share pledging and firm level over-investment. Utilizing Chinese A-share market data spanning 2007–2020, we find that firms with share pledging by controlling shareholders are more prone to over-invest, and the over-investment degree becomes severer as the pledging percentage increases. In addition, we observe this effect more pronounced in firms characterized by more concentrated ownership structure. Our findings still hold after the endogeneity disposal with a firm-fixed effect regression, Heckman two-stage regression with instrumental variables, the propensity score matching (PSM) and differences-in-differences (DID) approach. Furthermore, we observe that firms with controlling shareholders' share pledging tend to be concerned more with additional investments while neglecting maintenance investments and R&D investments. Combined with the motivation of controlling shareholders to gain substitute cash flow rights and convey good signals to the market, as well as the feasibility by using their dominate voting rights and pledged funds, it properly illustrates the mechanism through which controlling shareholders' share pledging impact over-investment, which meanwhile aggravates the principal-principal (PP) conflicts between controlling shareholders and minority shareholders. Consequently, our findings empirically demonstrate that signaling costs in signaling theory could be explicit conflicts in the agency theory, adding new empirical evidence for the relationship between signaling theory and agency theory.
format Article
author Geng, Huixia
Zhu, Hongbing
Lau, Wei Theng
Razak, Nazrul Hisyam Ab
Nor, Normaziah Mohd
spellingShingle Geng, Huixia
Zhu, Hongbing
Lau, Wei Theng
Razak, Nazrul Hisyam Ab
Nor, Normaziah Mohd
Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
author_facet Geng, Huixia
Zhu, Hongbing
Lau, Wei Theng
Razak, Nazrul Hisyam Ab
Nor, Normaziah Mohd
author_sort Geng, Huixia
title Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
title_short Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
title_full Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
title_fullStr Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
title_full_unstemmed Exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
title_sort exacerbate or alleviate? impact of controlling shareholders' share pledging on over-investment
publisher Elsevier
publishDate 2024
url http://psasir.upm.edu.my/id/eprint/112100/
https://www.sciencedirect.com/science/article/abs/pii/S0927538X24000921?via%3Dihub
_version_ 1814054745042583552
score 13.211869

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