Controlling shareholder pledging and corporate ESG behavior

Utilizing a large sample of Chinese listed firms, we document strong and robust evidence that both firms’ environmental, social, and governance (ESG) performance and their ESG disclosure quality deteriorate significantly after controlling shareholders’ pledging of their shares for personal loans. The results are especially evident among firms with higher valuation uncertainty, such as small firms and high-tech firms. Lastly, we show that external monitoring by institutional investors helps to mitigate such adverse impacts of controlling shareholder pledging. • Controlling shareholder pledging significantly negatively affects firms’ subsequent ESG performance. • Controlling shareholder pledging is also followed by deteriorating ESG disclosure quality. • The negative effect is especially evident among firms with higher valuation uncertainty, such as small and high-tech firms. • External monitoring by institutional investors helps to attenuate the negative effect 1 1 Although Bloomberg provides ESG disclosure quality scores for a reasonably large set of Chinese listed firms, it provides ESG performance scores for much fewer firms listed in the Chinese A-share markets (Environmental and Social performance scores are available for only 36 firms, and Governance performance scores are available for 243 firms during our sample period). Consistent with Broadstock et al. (2021) , we adopt ESG scores from SynTao Green Finance, which covers a much larger set of firms listed in the Chinese A-share markets compared to Bloomberg. .