Is Innovation-Related Textual Information True? Insight from Equity Pledging Behavior in Chinese A-Share Listed Firms

The reliability of innovative textual information is important for investors to evaluate a firm’s innovation status. TONE positivity of such information can reflect a firm’s innovation capabilities; however, its authenticity may be compromised in the context of equity pledging. Therefore, this study addresses a critical gap by examining the relationship between equity-pledging behavior and the TONE positivity of innovative textual information among Chinese A-share listed firms from 2011 to 2022. Utilizing Python for text analysis and panel fixed-effect regression models, the study reveals that equity pledging is positively associated with TONE positivity. However, TONE positivity does not significantly relate to the firm’s actual innovation capabilities but instead tends to increase when the firm’s performance declines. These findings suggest that shareholders may strategically manipulate the TONE positivity to maintain control during equity pledging. Additionally, the study identifies mechanisms to enhance the reliability of TONE positivity, such as reducing external financing, mitigating internal agency problems, increasing the proportion of independent directors, and minimizing dual roles. The study’s findings remain robust across various controls, including market sentiment, alternative proxies for innovation capabilities, industry factors, and shareholder ownership, as well as applying alternative methods like propensity score matching and difference-in-difference. These insights contribute to improving the quality of innovation-related textual information disclosure during equity pledging, enabling investors to make more informed assessments of a firm’s innovation status for future investment.