The Effects Of Controlling Shareholder’s Share Pledge On Stakeholders Behaviors

China attaches great importance to the risk prevention of controlling shareholders’ share pledges.The 19 th National Congress of the Communist Party of China(CPC)proposed,“there is a tough battle against major risks in China,and the financial regulatory system of the country should be improved”.To fight the battle,the CSRC and stock exchanges have revised the regulations of share pledges five times since 2017.While these regulations can restrict controlling shareholders’ behaviors in share pledges,the risk prevention also relies on the stakeholders of a firm.The stakeholders can monitor firms,and thus play an important role in the system of the financial regulation.In such a background,we investigate the impact of controlling shareholders’ share pledges on stakeholders’ monitoring behaviors.Our article is mainly based on principal-agent theory.This theory suggests that controlling shareholders’ pledging may affect the firm in two ways.First,controlling shareholders want to avoid margin calls after pledging.Hence,they have an incentive to reduce corporate information transparency.Second,controlling shareholders pledge shares possibly because of the lack of money,and it enhances their incentive of tunneling out the firm.If corporate governance structure is out of balance,controlling shareholders’ agency problems will become more serious.In other words,the way of curbing the agency problems in pledging is to ease the imbalance of corporate governance structure.The problems of “corporate governance structure imbalance” are divided into the problem of “equity structural imbalance” and “failure of the board”.Institutional investors can solve the former problem because of their professional governance ability and large shareholding.Independent directors can solve the latter problem because they have no money or family relationship with controlling shareholders.External auditing is a part of external corporate governance system,and it can solve the problem of “corporate governance structural imbalance”.Hence,we test institutional shareholders,independent directors,and external auditors when investigating how controlling shareholders’ share pledges affect stakeholders’ monitoring behaviors.The main contents and viewpoints of this paper are as follows:The first chapter is introduction.This chapter introduces the background and significance of this paper,and it also domenstrates the structural arrangements,research methods,and the contribution of this paper.The second chapter introduces the main theories involved in this paper.This chapter illustrates the principal-agent theory to introduces the causes of the agency problem of controlling shareholders,and it also suggests how to solve the problem of “corporate governance structural imbalance”.The third chapter is the literature review,which mainly reviews literature on controlling shareholders’ share pledges,institutional shareholders,independent directors,and external auditors.The fourth chapter discusses the effects of controlling shareholders’ share pledges on institutional investors’ monitoring behaviors.The empirical results show that controlling shareholders’ pledging has a positive effect on institutional investors’ monitoring behaviors,and this effect becomes more positive when the firm performs worse,institutional investors are more likely to monitor the firm,or institutional investors have better monitoring ability.This chapter also explores two ways of institutional investors to monitor the firm,i.e.,"voting with hands" and "voting with feet".The results show that the long-term institutional investors and domestic funds are more likely to "vote with their hands" in pledging,and the short-term institutional investors and QFII are more likely to "vote with their feet" in pledging.The fifth chapter discusses the effects of controlling shareholders’ share pledges on independent directors’ monitoring behaviors.The empirical results show that controlling shareholders’ pledging has a positive effect on independent directors’ monitoring behaviors,and this effect becomes more positive when independent directors have better ability to get information and process information.This chapter also explores whether the independent directors succeed or fail in the execution of their duty.The results show that controlling shareholders’ pledging makes independent directors attend board meetings more diligently.Due to the "relationship effect",share pledges have no effects on the monitoring behaviors of local independent directors.The sixth chapter discusses the effects of controlling shareholders’ share pledges on external auditors’ monitoring behaviors.The empirical results show that controlling shareholders’ pledging reduces the likelihood of qualified audit opinions and increases auditing fees.While share pledges strengthen the monitoring of external auditors,some of them compromise with controlling shareholders.This chapter also explores whether the quality of auditors and the purpose of pledging affect the impact of share pledges on external auditing.The results show that the quality of auditors positively affects the impact of share pledges on external auditing;share pledges have more positive effects on external auditing when the pledged loan funds are back into the firm.The seventh chapter includes research conclusions,suggestions and prospects.This research follows four strands of literature.The first is on share pledges.The prior studies find the negative effects of controlling shareholders’ share pledges on the firm from the perspectives of debt costs,corporate innovation,and corporate performance.However,little is known on how to protect the firm from these threats.Based on principal-agency theory,our article explores how stakeholders behave in share pledging,and thus reveals the relation between the imbalance of corporate governance structure and the harm on minority shareholders in share pledges.Our article expands the vision of the scholars who investigate controlling shareholders’ share pledges.The second is on institutional investors.The prior studies pay much attention to the activism of insititutional shareholders.While they consider the characteristics of institutional investors when exploring the monitoring role of them,they ignore that controlling shareholders can also affect institutional shareholders’ monitoring behaviors.We are the first to explore the effects of controlling shareholders’ share pledging on institutional shareholders’ monitoring in China.Our article provides empirical evidence of the effects of controlling shareholders on institutional investors’ monitoring decision-making,and we also provide a new idea on how to encourage institutional investors to participate in corporate governance.The third is on independent directors.The prior studies only find that independent directors can monitor controlling shareholders in share pledges.They ignore how independent directors monitor controlling shareholders in pledging.Our article fills the gaps by finding that pledging makes independent directors attend board meetings more diligently.We also find that share pledges have no effects on the monitoring behaviors of local independent directors and this provides empirical evidence of “relationship effects”.The fourth is on external auditing.The prior studies only consider the monitoring effects of external auditor in share pledging.They ignore that the external auditors may compromise with controlling shareholders in pledging.We contribute to the literature by finding that the external auditors are more likely to compromise with controlling shareholders when the industy concentration is lower.Moreover,we discuss the internal channels through which share pledge affects the monitoring of external auditor from the perspective of audit risk,and thus provides a theoretical explanation of this effect.