| Abstract: | This study examines the relationship between controlling shareholders’ participation in share pledging and accounting conservatism in the Chinese stock market. Share pledging introduces risks to controlling shareholders and leads to severe information asymmetry between controlling shareholders and outside minority shareholders. This, in turn, results in competing incentives with regard to financial reporting. We find that controlling shareholders’ participation in share pledging negatively affects accounting conservatism, especially for firms located in regions with weak legal enforcement and poor investor protection. Our study shows that controlling shareholders’ share‐pledging behaviour negatively influences firms’ reporting quality, especially in areas with weak legal systems. |
