Relationship Between Controlling Shareholders’ Participation in Share Pledging and Accounting Conservatism in China

Abstract

This study examines the relationship between controlling shareholders’ participation in share pledging and accounting conservatism in the Chinese stock market. Share pledging introduces risks to controlling shareholders and leads to severe information asymmetry between controlling shareholders and outside minority shareholders. This, in turn, results in competing incentives with regard to financial reporting. We find that controlling shareholders’ participation in share pledging negatively affects accounting conservatism, especially for firms located in regions with weak legal enforcement and poor investor protection. Our study shows that controlling shareholders’ share‐pledging behaviour negatively influences firms’ reporting quality, especially in areas with weak legal systems.

Do controlling shareholders share pledging affect goodwill impairment? Evidence from China

“…Following a prior study (Li et al , 2020; Ouyang et al , 2019), we conduct a PSM using 1:1 matching of the controlling shareholders’ share of pledged and non-pledged firms using Size , Lev , ROA , CSALES , SOE , CF , GW , CS , Salary , Age , industry and year as the matching criteria. Meanwhile, we impose a caliper distance of 0.03 (Shipman et al , 2017; Xu, 2019). The results are reported in Table 7, and as demonstrated, the main results continue to hold after using the PSM method.…”

“…When controlling shareholders have pledged shares, the executive pay-for-performance sensitivity decreases (Ouyang et al , 2019). In addition, Xu (2019) examines the relationship between share pledging and accounting conservatism in China, and finds that share pledging negatively affects accounting conservatism.…”

“…Second, this study contributes to the literature on economic consequence of share pledging. Existing researchers have mainly investigated the effects of share pledges on share repurchases, choices of auditors, executive pay-for-performance sensitivity, accounting conservatism and firm value (Chan et al , 2018; Ouyang et al , 2019; Wang et al , 2020; Xu, 2019; Xu et al , 2020). However, there is little known about its effects on goodwill impairment.…”

“…However, there is little known about its effects on goodwill impairment. Although Xu (2019) has found a negative effect of share pledging on accounting conservatism, they focus only on its effect on reporting quality from the overall level of financial reports, without considering its effect on an individual accounting information disclosure. Our paper adds to the literature by examining the effects of share pledging on goodwill impairment.…”

Editorial: Virtual Issue and Call for Special Issue on IFRS 9 Financial Instruments

“…This current issue of the journal contains five papers. Xu (2021) explores the association between controlling shareholders’ participation in share pledging (the use of shares as collateral when borrowing) and accounting conservatism in the Chinese stock market. The study finds that the practice of share pledging by controlling shareholders tends to negatively impact accounting conservatism, thus reducing the quality of financial reporting.…”