CSR Initiatives of Controlling Shareholder in Share Pledge Firms: Sustainable Orientation or Interim Plan?

. This paper investigates the e ﬀ ects of share pledge by controlling shareholder on corporate social responsibility and the mechanism through which stock pledge a ﬀ ects CSR. Using a sample of Chinese listed ﬁrms from 2008 to 2020, we ﬁnd that ﬁrms with pledging controlling shareholders are more likely to invest in corporate social responsibility (CSR) than other ﬁrms. Their CSR also perform better even when all pledge funds are invested to shareholders themselves rather than to the company’s operation. We then provide evidence to show that the motivating e ﬀ ect of stock pledge by controlling shareholder on CSR is related to controlling shareholder’s incentives to improve corporate value to prevent loss of corporate control and reduce the risk of stock price crash. These results consistently suggest that controlling shareholders employ corporate social responsibility as an e ﬀ ective way to reduce the risk of controlling right transfer


Introduction
Share pledge refers to a way of raising capital, repayment of which is guaranteed by equity shares, which is efficient and convenient to obtain. This kind of financing can ease financing restrictions imposed on controlling shareholders, but there is a potential risk of controlling transfer when share price drops and the firm suffers a margin closeout [1]. As a results, pledging of controlling shareholders shares is a risky way of raising funds. This phenomenon has aroused the concern of scholars over the risk of share pledging behaviors, especially pledging by controlling shareholders who are common in many countries and dominate firms' decision-making [2]. And the firms should be very careful when pledging the shares and make cautious decision on how to use the new funds raised in order to maintain the share price and prevent the risk of a margin closeout [3].
However, we notice that even after raising capital from the pledging of their controlling shareholders'share, many firms still invest a large amount of money into charitable donation in practice. For instance, according to CSMAR database the Lifan Technology Group Co. has been facing the capital constraint for years and has conducting the share pledging financing for over 20 times between the year of 2016 and 2018. And the amount of shares it pledged takes up for over 90% of its amount of original shares. Even under the case of capital constraints, Lifan Technology Co. has been active in investing in charitable donation and donated generously. Actually, the case of Lifan Technology group is not an exception. As we documented from published reports and news, plenty of companies who have high proportion of controlling shareholder share pledge experience an increase in charitable donations. This interesting phenomenon has been ignored by existing literature. However, the signal effect of CSR is not always immune to risks and failures in long-term. If firms fail to improve its production, operation after investors knowing the real financial situation of firms, the positive effect of CSR may be reduced. Controlling shareholders may preserve stock prices by maintaining status quo and avoiding risky investments such as CSR. Therefore, the impact of controlling shareholders' shares pledging on CSR performance remains empirically uncertain.
For several reasons, China provides a good platform for research on controlling shareholders' share pledges and CSR. Over the past decade, share pledging has become increasingly prevalent and important in China. Share pledge financing has started to proliferate since 2013 in Chinese capital market due to its convenience and efficiency in raising funds [4]. The total proportion of pledged shares in Chinese stock market has reached 5.66% by 2020 and the total value of capital involved in share pledge transaction reached 4.32 trillion RMB and 64% of Chinese A-share listed firms (4140) have pledged shares (2632). 1 A second advantage of China's share pledging is the availability of rich data allowing us to investigate its effects on corporate social responsibility empirically. As far as we know, China is one of the few markets that require disclosure of share pledges. Share pledging details have been required to be disclosed by Chinese listed firms since 2004 when a shareholder pledges more than 5% of outstanding shares. China's mandatory pledge disclosure requirement and early implementation of the policy provide us with comprehensive empirical data.
Moreover, CSR plays an important role in companies'operational goals due to the increased focus on public welfare among companies in China. Thus, it is likely for investors to pay more attention to CSR while valuing Chinese share pledge firms. Hence, without a comprehensive understanding of impact of share pledge on charitable donation, investors may be confused by complex CSR information and fail to invest properly.
The remainder of this paper is organized as follows: Section 2 provides a literature review. Section 3 develops the hypotheses. Section 4 introduces the methodology of empirical analysis. Section 5 presents and discusses results of empirical tests. Finally, Section 6 presents the conclusions and policy implications.

Motivation and Implication of Share Pledge
Previous studies have identified the positive impact of share pledge. For instance, share pledge can alleviate financial distress caused by short of capital, through converting the longterm book equity value into actual cash flows, for share pledge is a kind of financial act with equity as a pledge. Meanwhile, with prevention motivation the cash holding level will be increased [5].
However, in some cases, share pledge can have negative influences. Based on agency theory, share pledge could lead to worse second-type agency problem [6]. Share pledge would reduce the executive pay-for-performance sensitivity [7]. Meanwhile, controlling shareholders tend to maintain control position and benefits through earnings management of accruals [8] and tunneling, engage more in stock buybacks, manage disclosed information [9] to improve corporate performance and meanwhile, maintain stock price and even generate more stock return after share pledging [10]. Companies' insiders could obtain benefits by sacrificing the minority shareholders'interest through share pledges, leading to an increased risk of stock crashes. Moreover, share pledge behavior introduces the role of external pledgee. In order to ensure the timely recovery of funds, financial institution, as a pledgee, will supervise the pledged company. This external monitoring effect may also result in a reduction in the level of cash holdings and lead to future crash risk [11]. Thus, value and performance of companies may be damaged by controlling shareholders share pledge [8,12,13].
Based on the negative effect of share pledge on corporate, we want to investigate if there are some tools can help corporates to reduce the risk of it. And we focus on the signal effect of CSR performance, expecting to enrich the research about share pledge.

Background and Implication of CSR
Companies need to consider ethical factors in addition to economic objectives [14]. They need to engage CSR in commercial operations. Because of the increasing attention to CSR, related information disclosure system of Chinese listed firms has begun to be established. Guideline on Social Responsibility of Listed Firms was issued in 2006 and it encouraged firms listed in Shenzhen Stock Exchange to disclose CSR information. In 2008, Guideline for Environmental Information Disclosure of Listed Firms was issued and listed firms in Shanghai Stock Exchange was also encouraged to establish and improve their social responsibility system, and actively disclose social responsibility reports. Afterwards, firms listed in Shanghai Stock Exchange has been required to disclose their social responsibility reports since 2009. Moreover, sample shares of the Chinese Shenzhen Stock Exchange 100 Index are required to disclose their social responsibility reports.
A large number of studies provide evidence that CSR has impact on companies'performance. Specifically, companies with a higher level of CSR are more likely to have a better market valuation, better performance outcomes [15], and higher earnings quality [16]. However, some literature found contradictory results. For example, Shahbaz et al. [17] found that higher CSR level does not guarantee higher financial performance, which is measured by Tobin Q and ROA ratio. Results seem inconclusive in this field of study. Moreover, from perspective of risk, companies tend to experience lower stock crash risk with CSR engagement [18,19]. CSR investment may contribute to companies'sustainable development [20]. Actively undertaking CSR can also alleviate resource constraints and improve the sustainability and predictability of corporate earnings [21,22]. CSR could help establish core competitiveness [23] and obtain special corporate benefit, such as labor resource and social reputation [24,25]. A better reputation formed by charitable donation could then help cement the relationship between company and its stakeholders. As a result, companies can obtain more corporate resources for future development [26].
As for the motivations of CSR, some literature believe that the purpose of CSR is to increase the economic benefits of companies [27]. Many research find that companies take CSR as tool to conceal improper behaviors. Companies proactively undertake CSR and disclose relative information to direct public attention away from certain misconduct [28][29][30]. Such engagement may reduce the potential negative impact of companies'failure. This illustrates that CSR investment can send positive market signals which could alleviate information asymmetry, enhance stakeholders'confidence, reduce financing costs [31], and eventually affect the stock price [32]. Therefore, engaging social responsibility may also become a special tool for market value management.

Hypothesis Development
After share pledging, controlling shareholders who have the ability to influence companies'major decisions would face potential risks of controlling right transfer. If stock price drops to certain level, margin calls will be triggered. If firms fail to replenish the securities in time and stock price continues falling, forced stock closeout may occur thereafter and controlling rights may be transferred. Therefore, it's crucial to mitigate stock price fluctuations after share pledging, meaning that controlling shareholder has a stronger motivation to maintain stock price.
CSR, such as charitable donation, has a strong signaling effect and can have a remarkable impact on the public opinions on firms. Listed firms may strategically increase the amount of charitable donation to distract public attention away from certain improper behaviors and bad performance and release a positive signal of good performance. This will help strengthen investors'confidence and stabilize the stock price. Therefore, when controlling shareholder frequently pledge their shares or pledge a large number of shares, the motivation for value maintenance through charitable donation would be stronger. Based on the discussion above, we propose: The controlling shareholder share pledge behavior is positively related to the level of charitable donation in listed firms.

Empirical Models
Following the research of Xie et al. [10], the empirical models employed in this paper is as follows:

Sample and Variables
The sample employed includes Chinese listed firms for period 2008 to 2020. There are many measures for CSR [17,19,33]. Compared with other indicators, charitable donation is accessible and transparent in China. Due to the quantifiable and easily accessible characteristics, we choose charitable donation disclosed by social responsibility reports as the measurement of CSR. Moreover, CSR level is measured by the total amount of charitable donation lagging behind the year in the specific regression analysis because the average share pledge period in the sample is about two years.
(2) Share Pledge This paper measures the existence of share pledge by identifying whether the controlling shareholders pledge their holding shares. When the controlling shareholder share pledge of a listed firm occurs in the current year, Pledge=1; otherwise, Pledge=0. The total number of shares pledged (Pleshare) presents the total number of controlling shareholder shares pledged at the end of the year. Plefreq refers to the cumulative times of controlling shareholders share pledged at the end of the year. As the controlling shareholder may have multiple pledges in the same year, this article applies the ratio of the total number of shares pledged to the number of share pledges to act for the average number of the controlling shareholder shares pledge (Pleshareper) in order to measure the number of shares pledged each time. (

3) Control Variables
Following several related literatures, we control other variables that may affect CSR. The paper employs the controlling shareholder's shareholding ratio (Fshr), company size (Size), asset-liability ratio (Lev), dual role (Dual), property rights (State), return on assets (Roa), free cash flow (Fcf), book market value ratio (BM), price-earnings ratio (Pe), corporate growth (Growth) and other control variables. Table 1 presents the details.

Descriptive Statistics
According to the statistical results of the main variables in table 2, the average value of the share pledged dummy variable (Pledge) is 0.311, indicating that, in this sample, about 31.1% of the controlling shareholders carried out financing through the pledge of their shares. Besides, the mean value of the pledged share (Plefreq) is 8.789, implying that the average times of pledged share is greater than 1. Besides, the standard deviation of charitable donation is relatively large, suggesting that the amount of external donation from different listed firms during the sample period is quite different. Table 3 reports the empirical results of main hypothesis. We use three variables to measure share pledge, which are Pledge, Pleshare and Pleshareper. When other variables are not controlled, the coefficient of variable Pledge is 0.02006 at significance level of 10%. After considering controlling variables, coefficient of variable Pledge is 0.03809 at 1% significance level. Hypothesis holds. Thus, share pledge of the controlling shareholder is positively related to the charitable donation expenditure.

Main Regression Results
Moreover, the result shows that coefficient of variable Pleshare is 0.00063 at 10% significance level. After controlling the related variables, this result still holds. When the number of shares pledged by the controlling shareholder or the scale of the pledged share is larger, the charitable donation expenditure also increases.
As for the third variable of share pledge, coefficient of variable Pleshareper is 0.00225 at 10% significance level. The coefficient is still significantly positive at the 1% level after  Note: ***, ** and * indicate significance at the 1%, 5% and 10% level, respectively.
controlling some variables. The result indicates that the average number of shares pledged by the controlling shareholder each time is positively associated with charitable donation.
The results of above prove that share pledge firms indeed perform better in terms of CSR from three perspectives. Moreover, the more frequently the controlling shareholder pledges their shares, the more the listed firms spend on charitable donation. This shows companies tend to increase charitable donation investment to shape corporate image, and make up for the loss of reputation after share pledging.
The specific investment direction of funds raised from share pledging financing is considered for further study. Thus, samples invested in listed firms and third parties are excluded in subsequent regression, and only data of the pledged funds invested in the controlling shareholders themselves are retained. Column (4) in table 3 shows when all pledged funds are flowed to shareholders, share pledge behavior is still positively associated with charitable donation at 1% significance level. Taking the total number of pledged shares and the average number of pledged shares as independent variables for regression, the results still hold.
The results suggest that even when the pledged funds have not been fully invested in listed firms by pledged shareholders to improve the operating and financial conditions, listed firms are still generous in charitable donation, which may be used to divert investors' attention. This behavior alleviates the negative impact on company's financial situation, reduces the fluctuation of stock price, and thus eases the potential risk of stock close-out.

Mechanism of Motivation Effects of Stock Pledge on CSR
We found that firms are more likely to pursue CSR when controlling shareholders' shares are pledged. We further verify our conjecture that share pledging benefits firms through CSR. Hence, we investigate whether controlling shareholders' share pledging increase corporate value and reduce stock price crash by CSR.
(1) Corporate value and charitable donation Current researches on share pledge also focus on the influence on corporate value [11]. Based on the agency theory, controlling shareholders share pledge can increase the extent of separation between cash flow right and ownership right, which finally damages corporate value. Actively taking up social responsibilities may probably meet stakeholders'demand because it could help build corporate reputation, which in turn may positively influence market value [34]. The charitable donation may have a positive impact on stock prices [35].
Compared with companies where controlling shareholders'shares are not pledged, investors react more sensitively to performance of share pledge firms. Charitable donation would establish an altruistic corporate image and transmit positive signal that the company is in favorable financial situation. Investors could actively recognize such signal and may even produce overreaction. Thus, charitable donation could suppress the negative conjecture on the companies'operating status quo by distracting investors'attention away from share pledge behavior. Therefore, stock price can then be maintained or even increased.
According to the above analysis, share pledge firms may actively undertake social responsibilities in order to send positive signals, which can mitigate the negative impact of share pledge and obtain further trust by the investors. This could lead to growth of corporate value.
Hence, we examined whether charitable donation has a positive effect on corporate value after share pledging. TobinQ was introduced in the regression model, and the results are shown in table 4. After controlling a series of variables, the coefficient of charitable donation expenditure is 0.34740 at 1% significance level. This shows that implementation of charitable donation will indeed increase the company's short-term value.
In the group regression, the coefficient of charitable donation is positive at 10% significance level when pledge=1. When pledge=0, there is no significant correlation. It indicates that compared with listed firms that have not pledged the controlling shareholder's share, charitable donation can significantly increase the short-term corporate value of share pledged firms. This result also provide explanation for the higher charitable donation level after share pledging from economic motivation perspective.
(2) Stock price crash risk Considering the positive signal effect of CSR donation on corporate value, this article also investigates if CSR donation helps to reduce the risk of stock price crash. And these forms a series of evidence to support the increase in the value of the company by making CSR donation. According to the method of Callen and Fang [36], we use the CRASH indicator to measure the risk of stock price collapse. The greater the CRASH value, the greater the frequency of crashes. We can know from table 5 that risk of stock price collapse is significantly negative with the CSR donation at 1% significant level, which shows that CSR donation can help companies to reduce the risk of stock price collapse and increase the corporate value when pledge=1. When pledge=0, CSR donation is insignificant with risk of stock price collapse both with and without control variables.

Conclusion and Policy Implications
This study mainly tests the correlation between share pledge and CSR. We find that controlling shareholder share pledge has a significant impact on CSR level and after considering the investment direction of funds from share pledging finance, this positive relationship still holds. This shows that although the pledged funds have not been invested inside the listed firms, the level of charitable donation may still be increased in order to mitigate the negative impact of share pledge on stock price and avoid the risk of controlling right transfer.
The study has important policy implications for firms and their stakeholders. In China, CSR behavior has been attached greater importance. Lots of listed firms have disclosed information about CSR in compliance to relative CSR disclosure policies. We explore the specific impact of share pledge on CSR level. It helps regulators and market investors to understand the contradictory behavior of share pledge firms. What's more, the study also provides a new direction for regulators of the China Securities Regulatory Commission and other related organizations to make policy that strengthens the supervision and management of information disclosure of share pledge firms. Policymakers may consider the role of CSR in share pledge firms while planning the policy of surveillance policies.
Results of this study also urges policymaker to develop stricter policy which requires listed firms to disclose the source of capital invested into the charitable donation. Listed firms should make it clear whether the funds they used in CSR are the profits generated from operating activities or the capital raised from financing such as controlling shareholder share pledge financing. It makes sense that such disclosure requirement could provide more relevant information for companies'stakeholders in addition to the existing extant social responsibility reports requirement. Investors could judge the listed firms'actual financial and operational condition based on these results, especially when they have obtained share pledge financing.