Does share pledging impair stakeholder welfare? Evidence based on corporate social responsibility

This paper investigates whether and how share pledging by controlling shareholders affects stakeholder wealth using Chinese listed firms from 2007 to 2018. Employing corporate social responsibility (CSR) as a proxy for stakeholder welfare, we find that share pledging impedes a firm’s overall CSR, reduces activities associated with CSR strength scores, as well as dimensions related to the benefits of primary stakeholders. We further show that both the potential risks of being replaced and the actual margin call risks faced by controlling shareholders aggravate the negative relation between pledging and CSR, while the external monitoring and financial constraint channels do not seem to explain the negative relation. The evidence suggests that the controlling shareholders’ management of pledging risks is the underlying mechanism through which pledging impedes CSR and extracts benefits from stakeholders.