How do controlling shareholder pledges affect corporate green innovation: Evidence from China

Abstract

Background: Green innovation is essential for sustainable development but often faces financial and managerial constraints in emerging markets. Controlling shareholders’ behaviours, such as equity pledges, may impact firms’ long-term innovation incentives.
Aim: This study investigated how controlling shareholders’ equity pledges influence corporate green innovation and explores the underlying mechanisms and contextual variations of this relationship.
Setting: The research focused on Chinese A-share listed companies over the period from 2012 to 2022, offering insights from an emerging market context where both green transformation and equity pledging practices are prevalent.
Method: Using panel data regression analysis and mediation models, the study examines the direct impact of equity pledges on green innovation, and further analyses three mediating channels: Environmental, Social and Governance (ESG) performance, financing constraints, and tunnelling behaviour.
Results: The results show that controlling shareholders’ equity pledges significantly reduce firms’ green innovation efforts, primarily by lowering research and development (R&D) investment. The adverse effects operate through worsened ESG performance, tighter financing constraints, and increased tunnelling activities. However, the inhibitory effect is mitigated in firms with low pledge ratios, high pollution levels, or state ownership.
Conclusion: Equity pledging by controlling shareholders poses a substantial threat to green innovation in most firms, although certain firm characteristics can buffer this effect.
Contribution: This article contributes to the literature by uncovering the dark side of shareholder pledging behaviour in the context of environmental innovation, highlighting the need for regulatory scrutiny and corporate governance reforms to safeguard long-term sustainable development.