Collateral damage: Evidence from share pledging in China

This paper examines the effects of share pledging by controlling shareholders on tunneling. Using a sample of Chinese listed companies from 2004 to 2018, we find that share-pledging firms engage in more tunneling than non-share-pledging firms do. Our results are robust to alternative measures of tunneling, alternative estimation methods, and endogeneity checks using a difference-in-differences analysis. Moreover, we find that the positive association between share pledging and tunneling is more pronounced when firms' controlling shareholders have a stronger incentive to tunnel (e.g., firms with a greater wedge between cash flow rights and control rights) and when monitoring mechanisms are weak (e.g., firms with fewer analysts following or lower institutional holdings). •Share-pledging firms engage in more tunneling than non-share-pledging firms.•This effect is intensified when firms' controlling shareholders have stronger incentive to tunnel.•This effect is intensified when monitoring on the controlling shareholders is weaker.•We advance the emerging literature reporting that SP leads to more serious agency problems.