Abstract & Overview
Based on a sample of Chinese listed firms during the 2003–2016 period, this article examines whether share pledging by controlling shareholders influences real earnings management in firms. We show that firms where controlling shareholders pledge shares (‘pledging firms’ hereafter) are more likely to be involved in upwards earnings management through real activities. The positive association is more pronounced in non-SOE firms and in firms with a weaker balance of control rights. Our results suggest that, faced with the risk of possible foreclosure, which may result in losing control, controlling shareholders who have pledged stock will push the firm to manage earnings through real activities.