Share pledging by controlling shareholders and firm investment efficiency: Evidence from China

Share pledging is not strictly regulated in emerging markets, making it into a mechanism for controlling shareholders to cash out financing. Using data from Chinese listed companies (2008–2020), this study examines the relationship between controlling shareholder share pledging and corporate investment efficiency by incorporating the reinvestment behavior of pledged funds into an analytical framework. Results reveal a significant negative correlation between share pledging and investment efficiency by reducing information transparency, weakening corporate social responsibility(CSR), and damaging the effectiveness of internal control. However, pledged fund inflow can alleviate financing constraints and function as a reservoir to improve investment efficiency. When pledged funds flow into the enterprise, the reservoir effect becomes dominant, particularly in firms experiencing underinvestment issues. In this scenario, share pledges alleviate financing constraints, improve corporate investment efficiency. In contrast, when pledged funds flow out of the enterprise, weakened corporate governance from equity pledges triggers the tunneling effect, which exacerbates agency conflicts and reduces investment efficiency. Further analysis reveals that the tunneling effect is weaker for companies with high audit quality, strong media attention, and check-and-balance ownership. These findings, which remain robust after a series of tests including instrumental variable method(IV), propensity score matching(PSM), and alternative variable measurements, contribute to understanding share pledges' actual impact and mechanisms on firm-level resource allocation, yielding significant theoretical and practical insights for improving corporate governance and regulatory systems in emerging markets.