Research On Hollowing Behavior Of Controlling Shareholders Under Equity Pledge

In emerging markets,controlling shareholders play a crucial role in corporate governance and decision-making.However,controlling shareholders may engage in selfish behaviors that harm the interests of small shareholders and the overall company.In recent years,the trend of using equity as collateral for loans by controlling shareholders has increased.Equity pledge,as a common financing method,has a positive impact on solving corporate financing problems.However,as the proportion of equity pledge increases,it can also cause the problem of separation of ownership and control,weaken the cash flow rights of controlling shareholders,and exacerbate moral hazards.Especially in cases of information asymmetry,the conflict of interests between major shareholders and small shareholders becomes more prominent,which prompts controlling shareholders to resort to illegal means to embezzle the company.Moreover,China’s listed companies generally have concentrated ownership structures,and the policy environment of the capital market is not perfect,which provides opportunities for controlling shareholders to engage in embezzlement.Taking the case of Cody Dairy as an example,this article first discusses the motives of controlling shareholders’ embezzlement from the perspectives of the theory of private benefits of control and the theory of agency costs,analyzes the separation of ownership and control after their equity pledge,and the agency problems that arise from it.It is found that the separation of ownership and control caused by equity pledge can lead to an exacerbation of embezzlement.Then,several embezzlement methods used by controlling shareholders are analyzed,and the reasons for their successful embezzlement from both internal and external perspectives are examined.Finally,the impact of embezzlement is analyzed,revealing its effects on the company’s financial condition and using an event study to analyze the degree of market reaction to embezzlement incidents and their negative effects on the capital market.Through a detailed analysis of the Cody Dairy embezzlement case,this article concludes that the driving force behind embezzlement is the private interests of controlling shareholders.A high proportion of equity pledge leads to a high degree of separation of ownership and control,causing controlling shareholders to focus more on personal gain and use their control over company decision-making to gain more personal benefits.The main reasons for the implementation of embezzlement are the defects in the company’s equity and governance structure and the imperfect external policy environment.Finally,embezzlement not only leads to the deterioration of the company’s financial condition but also seriously harms the rights and interests of shareholders and investors and undermines the order of the capital market.Based on these conclusions,to prevent controlling shareholders from engaging in embezzlement,this article proposes the following recommendations: strengthen supervision from both internal governance and external policy systems,regulate equity and governance structures,improve information disclosure systems,increase market transparency,and prevent embezzlement from occurring again.