The Influence Of Controlling Shareholder’s Equity Pledge On The Inefficient Investment Of Enterprises

Since the emergence of the equity pledge business in 1995,it has gradually developed into a popular financing model for shareholders,especially when private enterprises and SMEs are facing huge financing constraints,equity pledges are one of the best ways to obtain capital.2013 saw the official launch of the equity pledge repo business in China,bringing its development to a new stage,with the scale of pledges expanding and exploding growth.Since the promulgation of the new equity pledge regulations in 2018,the size of the overall equity pledge market,compared to its peak,has seen a significant contraction.Although equity pledges have advantages such as ease of operation and quick access to capital,they also carry risks such as forced liquidation and transfer of control.Whether the controlling shareholder is able to choose reasonable projects to invest the funds obtained from the pledge of equity and enhance the investment efficiency of the company has a great impact on the long-term health of the company.This paper will therefore examine whether equity pledges by controlling shareholders can cause inefficient investment in a company from an investment efficiency perspective and analyses the impact of a company’s equity concentration and the quality of internal controls on the relationship between the two.This helps to further investigate both the economic impact of equity pledges and the causes of inefficient corporate investment,and further clarifies the importance of improving a company’s equity concentration and strengthening the quality of its internal controls.This study uses non-financial firms in the A-share market as a sample from 2009 through 2020.Using existing research findings,this paper builds a multiple regression model to empirically investigate the impact of controlling shareholders’pledging of equity to inefficient corporate investment,and investigates the moderating effect of equity concentration and internal control quality using a panel threshold regression model.The study shows that:(1)Controlling shareholder equity pledges are positively correlated with corporate inefficient investment.(2)In non-state-owned enterprises,the positive association between controlling owners’equity pledges and inefficient investment is stronger than in state-owned firms.(3)The positive correlation between controlling shareholders’ equity pledges and firms’inefficient investment increases with the increase of firms’ equity concentration.(4)As the quality of a company’s internal control improves,the positive association between controlling owners’ equity pledges and wasteful investment declines.To mitigate the adverse impact of equity pledges on companies and the economic market,it is necessary to improve and optimise the equity structure and strengthen the quality of internal controls;the government and financial institutions should fundamentally address the financing difficulties of private enterprises through market-based funds and capital management schemes.