Controlling shareholder equity pledging and tone management: Evidence from China

This study explores the market value management motives of controlling shareholders with equity pledges focusing on non-financial information. Our findings reveal that controlling shareholder equity pledging (CSEP) positively affects the tone management of corporate annual reports. We establish causality using a range of techniques, including a difference-in-differences method based on a regulatory change. Mechanism analyses suggest that this relationship is primarily the result of controlling shareholders’ incentives to mitigate the risk of control transfer and their ability to manipulate the tone of annual reports. The effect of CSEP is more significant in firms with shorter CEO tenures, distracted institutional investors, and higher analyst attention. While tone management may temporarily enhance market value, it diminishes the accuracy of analysts’ forecasts. Finally, we document a timing effect in the annual report disclosures of these firms. Our study reveals that tone management is a strategic tool for listed firms with CSEP to reduce pledge risk, which provides valuable insights for information users and regulators.