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Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice

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  • Jingjing Xu
  • Yan Zhang
  • Yizhe Xie

Abstract

This study investigates auditor choice in firms whose shares are pledged by their controlling shareholders as collateral for margin loans to financial institutions. To cope with risks arising from share pledging, controlling shareholders can be divided in choosing an auditor in terms of auditor quality—with some who might engage in financial reporting manipulation prefer a low-quality report while the others favor a higher quality to alleviate minority shareholder’s potential concerns. Using detailed data of Chinese listed-firms from 2007 to 2016, we find that it is less likely for firms with share pledging controlling shareholders to employ Top 10 audit firms. Further tests show that the reporting quality of pledge firms choosing non-Top 10 audit is poorer, but the audit opinion is not worse. Besides, higher audit fee for pledge firms suggests that controlling shareholders’ share pledging is considered to be with higher audit risk by auditor.

Suggested Citation

  • Jingjing Xu & Yan Zhang & Yizhe Xie, 2020. "Controlling Shareholder’s Share Pledging and Firm’s Auditor Choice," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(4), pages 750-770, March.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:4:p:750-770
    DOI: 10.1080/1540496X.2018.1549030
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    Cited by:

    1. Zhang, Hao & Jin, Tian & Chen, Hanbin, 2023. "Do controlling shareholders collude with their related large shareholders? Evidence of equity pledges and shareholding increases from China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Wang, Xiaoqiong & Zhen, Hongxian & Zhu, Feifei, 2023. "Voting with their feet: Controlling shareholders' share pledging and other major shareholders' strategic response," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Liu, Wei & Tian, Gary Gang, 2022. "Controlling shareholder share pledging and the cost of equity capital: Evidence from China," The British Accounting Review, Elsevier, vol. 54(6).
    4. Sheng, Dachen & Montgomery, Heather A., 2024. "The Heterogenous causality of repurchases: Analysis from the aspect of share collateralization," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    5. Zhu, Bing & Xia, Xiaoxue & Zheng, Xiaojia, 2021. "One way out of the share pledging quagmire: Evidence from mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 71(C).
    6. Le Lin & Ke Liao & Deren Xie, 2023. "When Investors Speak, Do Firms Listen? The Role of Investors' Dividend‐related Complaints from Online Earnings Communication Conferences," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 32-75, March.
    7. Zhou, Jingting & Li, Wanli & Yan, Ziqiao & Lyu, Huaili, 2021. "Controlling shareholder share pledging and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 77(C).
    8. Hou, Xipei & Shen, Yinjie(Victor) & Xing, Jing & Zhou, Fuzhao, 2023. "Hastily announced: Mergers and acquisitions with pledging shareholders," Journal of Financial Stability, Elsevier, vol. 67(C).
    9. Hu, Jun & Long, Wenbin & Luo, Le & Peng, Yuanhuai, 2021. "Share pledging and optimism in analyst earnings forecasts: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 132(C).
    10. Cui, Xin & Ma, Tingting & Xie, Xiaochen & Goodell, John W., 2023. "Uncertainty of uncertainty and accounting conservatism," Finance Research Letters, Elsevier, vol. 52(C).
    11. Shen, Haomin & Cheng, Xiaoke & Ouyang, Caiyue & Li, Ya & Chan, Kam C., 2022. "Does share pledging affect firms' use of derivatives? Evidence from China," Emerging Markets Review, Elsevier, vol. 50(C).
    12. Jiang, Hui & Qian, Xiaolei & Ren, Daling & Peng, Cheng, 2024. "Tunneling motivation or legitimacy motivation? The impact of digital transformation on controlling shareholders' share pledging," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 1204-1224.
    13. Li, Shaofang & Tian, Sihua & Gu, Qinen, 2025. "Share pledging and non-financial corporations’ systemic risk contribution: Evidence from China," Research in International Business and Finance, Elsevier, vol. 73(PA).
    14. Jiacai Xiong & Yixing Tong & Feida Zhang & Caiyue Ouyang & Kam C. Chan, 2024. "Does share pledging affect corporate philanthropy? Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 51(1-2), pages 180-208, January.
    15. Wang, Mingwei & Zhang, Junping & Liang, Decui, 2024. "Multi-period share pledging with sequential three-way proportion decision," Omega, Elsevier, vol. 127(C).
    16. Cheng Guo & Huang Rong & Zhaiting Yang & Stavros Sindakis & Sakshi Aggarwal, 2024. "Controlling Shareholder Pledges and Cost of Equity Capital: Analyzing Empirical Evidence from A-Share Listed Companies," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 5914-5938, June.
    17. Gao, Yang & Ling, Yun & Peng, Hui, 2024. "Before thrive, first survive: The impact of controlling shareholder pledging on corporate ESG performance," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    18. Chengcheng Li & Xiaoqiong Wang & Feifei Zhu, 2024. "Does share pledging impair stakeholder welfare? Evidence based on corporate social responsibility," Review of Quantitative Finance and Accounting, Springer, vol. 63(4), pages 1155-1192, November.
    19. Li, Shengnan & Zheng, Xinya & Niu, Jianbo & Ma, Xuan, 2024. "Share pledging of controlling shareholders and corporate social responsibility disclosure," Research in International Business and Finance, Elsevier, vol. 67(PA).
    20. Feng, Yumei & Pei, Hongxin & Pan, Yuying & Ho, Kung-Cheng, 2025. "Impact of fund cliques on corporate cash dividends: Evidence from China," Research in International Business and Finance, Elsevier, vol. 73(PA).
    21. Jiang, Fuwei & Ma, Tian & Zhu, Feifei, 2024. "Fundamental characteristics, machine learning, and stock price crash risk," Journal of Financial Markets, Elsevier, vol. 69(C).
    22. He, Mingfeng & Huang, Dengshi & Zhou, Jianan, 2023. "The impacts of share pledging on firm investment timing and valuation," International Review of Financial Analysis, Elsevier, vol. 87(C).
    23. Hu, Jing & Zhong, Lejia & Qiao, Jingyuan, 2024. "Equity pledge and debt financing of listed companies," Finance Research Letters, Elsevier, vol. 59(C).

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