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ABSTRACT This study examines the relationship between controlling shareholders’ share pledging and (a) firms’ financial leverage and (b) the cost of debt. The evidence shows that controlling shareholders’ pledging activity is positively associated with firms’ total debt ratios and cost of debt. Further analyses show that better corporate governance and greater transparency can mitigate the increase in debt costs. The results remain robust after addressing endogeneity concerns using an instrumental variable approach and propensity score matching. We also conduct additional tests suggesting that information asymmetry may be an important driver of our findings while partially ruling out two alternative explanations. Overall, this study provides support for the pecking order theory and suggests that controlling shareholders’ share pledging is an additional determinant associated with firms’ capital structure and cost of capital.
Chen et al. (Mon,) studied this question.