Agency costs, ownership nature, and the impact of controlling shareholders' equity pledge on corporate investment

As a critical strategic decision, investment is not only related to the growth of a nation's GDP but also determines the development and value enhancement of listed companies at the micro level. As the world's second-largest economy, financing constraints have always been an essential factor restricting investment by Chinese companies. The equity pledge, a novel financing method characterized by rapid capital acquisition and retention of shareholder control, has rapidly gained popularity in the market. However, the high ownership concentration typical of Chinese listed companies often leads to dominant controlling shareholders. These dominant controlling shareholders exert significant influence over corporate investment decisions. Given the increasing frequency of equity pledges by these shareholders, the effects of such pledges on corporate investment have become a focal point of interest among academic researchers and industry practitioners. Taking the controlling shareholders' equity pledges as the breakthrough point, combining the agency and control rights theories, this research selects the non- financial A-share listed companies in Shanghai and Shenzhen stock markets from 2013 to 2022 as the initial samples. Utilizing the fixed effect model of unbalanced panel data, along with the mediating and moderating effect models, this study seeks to thoroughly and systematically explore three key issues: Firstly, what influence do companies with controlling shareholders' equity pledges have on corporate investments compared to companies without equity pledges? Secondly, how do companies with controlling shareholders' equity pledges affect investment? Do these companies increase the second type of agency cost between controlling and minority shareholders? What effect does this agency cost have on corporate investments? Thirdly, considering the nature of ownership difference, do controlling shareholders have supervisory or encroachment effects in companies with equity pledges? Firstly, the research results show that companies with controlling shareholders' equity pledges significantly impact corporate investments. In particular, the pledge of the controlling shareholders' equity reduces the scale and efficiency of internal corporate investments. The investment structure is more inclined to financial investments than real investments, and an increase in external mergers and acquisitions. Second, the results show significant influences of the controlling shareholders' equity pledges on corporate investments by increasing the agency cost between controlling and minority shareholders. This mechanism is effective in terms of investment scale, structure, and external investment, but not investment efficiency. The equity pledge of the controlling shareholder increases the second agency cost, which further affects corporate investment scale, structure, and external investment. Finally, the research results show that state-owned controlling shareholders exert effects of supervision and governance in the relationship between the equity pledges of controlling shareholders and corporate investments. The research not only deepens the understanding of the economic consequences of the controlling shareholders' equity pledges and the factors that affect corporate investments, but it also expands the research scenario of the agency problem between the controlling and minority shareholders as well as the supervision and governance effects of the state-owned controlling shareholder.

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