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).