Research On The Effect Of Controlling Shareholder’s Equity Pledge On Financial Restatement Of Listed Companies

Since the opening of the on-market equity pledge business in 2013,equity pledges by controlling shareholders of listed companies have been in full swing in China’s capital market.Equity pledge financing is favored by the controlling shareholders of listed companies because of its low cost and few constraints.But pledge busts and transfer of control due to plummeting stock prices are common,triggering investor panic and systemic risk in the capital market.The frequent explosion of equity pledging has aroused deep concern in academic and practical circles,and relevant departments have issued a series of regulations and policies one after another.In this context,it is important to study equity pledging behavior and its impact to maintain the stability of China’s financial market and promote high-quality economic development.The risk of losing control is an important factor affecting the success or failure of controlling shareholders’ equity pledge financing.To mitigate this risk,the controlling shareholders will stabilize the share price through information manipulation,thus laying a hidden danger for corporate financial restatement.There have been studies that examine the economic consequences of controlling shareholders’ equity pledges from the perspective of accounting information quality,such as accrual earnings management and true earnings management.However,they generally treat earnings management and financial restatement as near-equivalents and as external manifestations of poor accounting information quality,without considering purposive financial restatement behavior motivated by earnings management.Therefore,based on relevant theories and existing research,this paper investigates the impact mechanism of controlling shareholder’s equity pledges on the financial restatement of listed companies under the logical framework of "controlling shareholder’s equity pledges-earnings management-financial restatement",and examines the heterogeneity of the relationship between the two under different control transfer risks.Using a sample of non-financial listed companies in China’s Shanghai and Shenzhen A-shares from 2013-2020,we use a logit model to test and find that(1)the probability of financial restatement is greater for listed companies with controlling shareholders’ equity pledges,and the higher the equity pledge ratio the greater the probability of financial restatement;(2)controlling shareholders’ equity pledges prompt listed companies to implement earnings management activities thus triggering financial restatement,and the interplay of annual report tone management and earnings management strengthens the market value management motive of companies,leading to an increase in the probability of financial restatement;(3)the risk of losing control is a key factor affecting the manipulation of equity pledge controlling shareholders,and the higher the risk of losing control and the higher the probability of financial restatement under bear market conditions and the nature of non-state ownership.In addition,we use propensity score matching,difference-in-difference tests,rescreening of the sample,and variable replacement to ensure the robustness of the results.This paper studies the financial restatement behavior of companies in the context of controlling shareholders’ equity pledges.It enriches the literature on the impact of controlling shareholders’ equity pledges on listed companies,provides an empirical basis for regulating the regulation of equity pledges and annual report information disclosure,and prompts the relevant authorities to establish a more complete governance scheme for equity pledge risks and information disclosure guidelines.Also,it is beneficial to support the healthy development of listed companies and the capital market and to safeguard the interests of investors and small and medium-sized shareholders.