IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v93y2025ics0927538x25001933.html

Managerial ownership pays off: Controlling shareholders' share pledging and corporate innovation quality in China

Author

Listed:
  • Liu, Bei
  • Wang, Yuan
  • Yang, Lufei
  • Bian, Huabin

Abstract

In China, listed companies are characterized by high equity concentration, where controlling shareholders play a decisive role in corporate decision-making. This paper investigates the impact of controlling shareholders' share pledging on corporate innovation quality using A-share listed firms from 2010 to 2020. The findings reveal that equity pledging by controlling shareholders significantly suppresses corporate innovation quality, primarily through a reduction in R&D investment intensity. Furthermore, managerial ownership mitigates this negative effect, with a stronger moderating role in firms where the CEO and chairman roles are separated. The suppression effect is more pronounced in firms with weaker external governance, such as lower audit quality and less analyst coverage. The results highlight the interplay between internal and external governance in corporate innovation, offering insights for policymakers and investors on mitigating the risks of share pledging.

Suggested Citation

  • Liu, Bei & Wang, Yuan & Yang, Lufei & Bian, Huabin, 2025. "Managerial ownership pays off: Controlling shareholders' share pledging and corporate innovation quality in China," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001933
    DOI: 10.1016/j.pacfin.2025.102856
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X25001933
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2025.102856?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Peng, Winnie Qian & Wei, K.C. John & Yang, Zhishu, 2011. "Tunneling or propping: Evidence from connected transactions in China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 306-325, April.
    2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Leung, T.Y. & Sharma, Piyush, 2021. "Differences in the impact of R&D intensity and R&D internationalization on firm performance – Mediating role of innovation performance," Journal of Business Research, Elsevier, vol. 131(C), pages 81-91.
    5. Singh, Jasjit, 2008. "Distributed R&D, cross-regional knowledge integration and quality of innovative output," Research Policy, Elsevier, vol. 37(1), pages 77-96, February.
    6. Jiandong Chen & Douglas Cumming & Wenxuan Hou & Edward Lee, 2016. "Does the External Monitoring Effect of Financial Analysts Deter Corporate Fraud in China?," Journal of Business Ethics, Springer, vol. 134(4), pages 727-742, April.
    7. Nassimbeni, Guido, 2001. "Technology, innovation capacity, and the export attitude of small manufacturing firms: a logit/tobit model," Research Policy, Elsevier, vol. 30(2), pages 245-262, February.
    8. Vivian W. Fang & Xuan Tian & Sheri Tice, 2014. "Does Stock Liquidity Enhance or Impede Firm Innovation?," Journal of Finance, American Finance Association, vol. 69(5), pages 2085-2125, October.
    9. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    10. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    11. Guariglia, Alessandra & Liu, Pei, 2014. "To what extent do financing constraints affect Chinese firms' innovation activities?," International Review of Financial Analysis, Elsevier, vol. 36(C), pages 223-240.
    12. Valentina Meliciani, 2000. "The relationship between R&D, investment and patents: a panel data analysis," Applied Economics, Taylor & Francis Journals, vol. 32(11), pages 1429-1437.
    13. Giovanni Valentini, 2012. "Measuring the effect of M&A on patenting quantity and quality," Strategic Management Journal, Wiley Blackwell, vol. 33(3), pages 336-346, March.
    14. Czarnitzki, Dirk & Hanel, Petr & Rosa, Julio Miguel, 2011. "Evaluating the impact of R&D tax credits on innovation: A microeconometric study on Canadian firms," Research Policy, Elsevier, vol. 40(2), pages 217-229, March.
    15. Joseph P. H. Fan & T. J. Wong, 2005. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 43(1), pages 35-72, March.
    16. Cronqvist, Henrik & Nilsson, Mattias, 2003. "Agency Costs of Controlling Minority Shareholders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 695-719, December.
    17. Wu, Hsueh-Liang, 2008. "When does internal governance make firms innovative," Journal of Business Research, Elsevier, vol. 61(2), pages 141-153, February.
    18. Tang, Dapeng & Yu, Qian & Gebrehans, Mebrahtu Tesfagebreal & Wang, Lulu, 2023. "The asymmetric innovation effects of heterogeneous government subsidies: A new perspective from GDP target deviation," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    19. Gogineni, Sridhar & Linn, Scott C. & Yadav, Pradeep K., 2022. "Vertical and Horizontal Agency Problems in Private Firms: Ownership Structure and Operating Performance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 57(4), pages 1237-1278, June.
    20. Hu, Jun & Long, Wenbin & Luo, Le & Peng, Yuanhuai, 2021. "Share pledging and optimism in analyst earnings forecasts: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 132(C).
    21. Wu, Aihua, 2017. "The signal effect of Government R&D Subsidies in China: Does ownership matter?," Technological Forecasting and Social Change, Elsevier, vol. 117(C), pages 339-345.
    22. Becker-Blease, John R., 2011. "Governance and innovation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 947-958, September.
    23. Xu, Jingjing & Huang, Haijie, 2021. "Pay more or pay less? The impact of controlling shareholders' share pledging on firms' dividend payouts," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    24. González, Xulia & Pazó, Consuelo, 2008. "Do public subsidies stimulate private R&D spending?," Research Policy, Elsevier, vol. 37(3), pages 371-389, April.
    25. Pang, Caiji & Wang, Ying, 2020. "Stock pledge, risk of losing control and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 60(C).
    26. Mowery, David C. & Ziedonis, Arvids A., 2002. "Academic patent quality and quantity before and after the Bayh-Dole act in the United States," Research Policy, Elsevier, vol. 31(3), pages 399-418, March.
    27. De Cesari, Amedeo, 2012. "Expropriation of minority shareholders and payout policy," The British Accounting Review, Elsevier, vol. 44(4), pages 207-220.
    28. Wenping Qi & Yongqi Bi & Weixue Chen & Dianpeng Wang & Kai Xing, 2025. "Corporate Violations and Audit Opinions: Warning Effect or Uncovering Effect?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 61(4), pages 1130-1149, March.
    29. Li, Chunyu & Lou, Chenxin & Luo, Dan & Xing, Kai, 2021. "Chinese corporate distress prediction using LASSO: The role of earnings management," International Review of Financial Analysis, Elsevier, vol. 76(C).
    30. Li, Shan & Xing, Kai & Meng, Jixian & Yang, Xiaoguang, 2025. "How does the innovation of digital and green technology integration promote corporate environmental performance," International Review of Economics & Finance, Elsevier, vol. 99(C).
    31. Zhang, Ping & Wang, Yiru, 2023. "The bright side of analyst coverage on corporate innovation: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    32. Kira R. Fabrizio & Ulya Tsolmon, 2014. "An Empirical Examination of the Procyclicality of R&D Investment and Innovation," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 662-675, October.
    33. Lanfeng Kao & Jeng‐Ren Chiou & Anlin Chen, 2004. "The Agency Problems, Firm Performance and Monitoring Mechanisms: the evidence from collateralised shares in Taiwan," Corporate Governance: An International Review, Wiley Blackwell, vol. 12(3), pages 389-402, July.
    34. Shai Bernstein, 2015. "Does Going Public Affect Innovation?," Journal of Finance, American Finance Association, vol. 70(4), pages 1365-1403, August.
    35. Hanna Hottenrott & Bettina Peters, 2012. "Innovative Capability and Financing Constraints for Innovation: More Money, More Innovation?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1126-1142, November.
    36. Jiang, Yifan, 2025. "Exploring the nexus of executive incentives and corporate innovation efficiency: The moderating role of internal governance factors," Finance Research Letters, Elsevier, vol. 81(C).
    37. Ronald Anderson & Michael Puleo, 2020. "Insider Share-Pledging and Equity Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 58(1), pages 1-25, August.
    38. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
    39. Zhu, Bing & Xia, Xiaoxue & Zheng, Xiaojia, 2021. "One way out of the share pledging quagmire: Evidence from mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 71(C).
    40. Yang, Haochang & Li, Lianshui & Liu, Yaobin, 2022. "The effect of manufacturing intelligence on green innovation performance in China," Technological Forecasting and Social Change, Elsevier, vol. 178(C).
    41. Blind, Knut, 2012. "The influence of regulations on innovation: A quantitative assessment for OECD countries," Research Policy, Elsevier, vol. 41(2), pages 391-400.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tian, Guangning & Zhou, Shuyuan & Hsu, Sara, 2020. "Executive financial literacy and firm innovation in China," Pacific-Basin Finance Journal, Elsevier, vol. 62(C).
    2. Chang, Jeffery (Jinfan) & Meng, Qingbin & Ni, Xiaoran, 2022. "A tale of riskiness: The real effects of share pledging on the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    3. Surenderrao Komera & P. J. Jijo Lukose & Subash Sasidharan, 2018. "Does business group affiliation encourage R&D activities? Evidence from India," Asia Pacific Journal of Management, Springer, vol. 35(4), pages 887-917, December.
    4. Hsin-han Shen, Carl & Zhang, Hao, 2025. "Share pledging of insiders and corporate debt contracting," Journal of Banking & Finance, Elsevier, vol. 181(C).
    5. Luo, Danglun & Piao, Zhirong & Wu, Cen & Zhang, Frank Feida, 2024. "Collateral damage: Evidence from share pledging in China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    6. Wang, Mingwei & Zhang, Junping & Liang, Decui, 2024. "Multi-period share pledging with sequential three-way proportion decision," Omega, Elsevier, vol. 127(C).
    7. Zhu, Bing & Xia, Xiaoxue & Zheng, Xiaojia, 2021. "One way out of the share pledging quagmire: Evidence from mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 71(C).
    8. Wang, Xiaoqiong & Zhen, Hongxian & Zhu, Feifei, 2023. "Voting with their feet: Controlling shareholders' share pledging and other major shareholders' strategic response," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    9. Glaeser, Stephen, 2018. "The effects of proprietary information on corporate disclosure and transparency: Evidence from trade secrets," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 163-193.
    10. Shi, Yang & Li, Jiachen & Liu, Ruiming, 2023. "Financing constraints and share pledges: Evidence from the share pledge reform in China," Journal of Corporate Finance, Elsevier, vol. 78(C).
    11. Estévez-Mendoza, Carlos & Montoro-Sánchez, Ángeles, 2024. "Exploring the relationship between innovation and corporate governance," Technological Forecasting and Social Change, Elsevier, vol. 209(C).
    12. Trinh, Tri & Walker, Mark D. & Yost, Keven, 2025. "Managerial response to institutional investor distraction," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    13. Lily Nguyen & Le Vu & Xiangkang Yin, 2021. "Share repurchases and firm innovation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1665-1695, April.
    14. Han, Han & Zhao, Xueqing & Wang, Zhibin, 2023. "The effect of stock pledge on corporate fraudulence: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    15. Daniel Bradley & Incheol Kim & Xuan Tian, 2017. "Do Unions Affect Innovation?," Management Science, INFORMS, vol. 63(7), pages 2251-2271, July.
    16. Xu, Hongkang, 2025. "Regulatory fragmentation and corporate innovation," Journal of Empirical Finance, Elsevier, vol. 82(C).
    17. Yuan, Rongli & Wen, Wen, 2018. "Managerial foreign experience and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 752-770.
    18. Cui, Xin & Wang, Chunfeng & Liao, Jing & Fang, Zhenming & Cheng, Feiyang, 2021. "Economic policy uncertainty exposure and corporate innovation investment: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    19. Hou, Xipei & Shen, Yinjie(Victor) & Xing, Jing & Zhou, Fuzhao, 2023. "Hastily announced: Mergers and acquisitions with pledging shareholders," Journal of Financial Stability, Elsevier, vol. 67(C).
    20. Zhang, Ping & Wang, Yiru & Gao, Jieying, 2023. "Going public and innovation: Evidence from the ChiNext stock market," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 586-613.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001933. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.