Equity Pledging by Controlling Shareholders, Executive Incentives, and Corporate Innovation

In recent years, equity pledging by controlling shareholders has expanded rapidly as an emerging financing mechanism. Although existing studies document that equity pledging by controlling shareholders undermines corporate innovation, the underlying mechanisms remain insufficiently explored. Based on theoretical analysis and empirical evidence, this paper investigates the specific mechanisms and channels through which controlling shareholders’ equity pledges exert negative effects on firms’ innovation activities. We find that, in order to stabilize short-term stock price stability, controlling shareholders increase the proportion of short-term compensation in executive pay following equity pledges, which in return reduces the share of compensation. Given that long-term executive compensation incentives are positively associated with firms’ innovation intensity, weaker long-term compensation incentives lead to a decline in innovation investment. Further analysis reveals that executive incentives partially mediate the relationship between controlling shareholders’ equity pledging and corporate R&D investment. By clarifying the effects and mechanisms through which controlling shareholders’ equity pledging influences corporate innovation, this study contributes to the innovation literature from a theoretical perspective and provides policy implications for external investors, financial institutions, and government agencies, providing new insights into improving t governance in listed firms.