International Review of Financial Analysis 90 (2023) 102853

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International Review of Financial Analysis

journal homepage: www.elsevier.com/locate/irfa

Controlling shareholders’ equity pledge, digital finance, and corporate

digital transformation
Yue Zhang a, Mengshuai Ge a, Jiaju Yang a, Cuiying Liu a, Xi Chen b, *
a
School of Management, Hebei University, Baoding 071002, China
b
School of Humanities and Social Sciences, Jiangsu University of Science and Technology, Zhenjiang 212100, China

A R T I C L E I N F O A B S T R A C T

Keywords: Corporate digital transformation (CDT) is an inevitable choice for stimulating business vitality and cultivating
Equity pledge market competitiveness. This paper focuses on the impact of controlling shareholders’ equity pledge (CSEP) on
Digital finance CDT. Based on the theoretical background, an empirical analysis was conducted using data on listed corporations
Digital transformation
in China from 2011 to 2021. The results show that CSEP has an inverted U-shaped nonlinear impact on CDT.
Inverted U-shape
Meanwhile, digital finance plays a moderating role in the relationship between CSEP and CDT. At lower levels of
digital finance development, the impact of CSEP on CDT remains inverted U-shaped. However, when digital
finance reaches medium and higher levels of development, the impact of CSEP on CDT shows a linear promotion
effect, and the higher this level, the stronger the promotion effect. Finally, from the perspective of share price
collapse risk and controlling shareholders’ appropriation behavior, we verify that the motives for preventing
control transfer risk and appropriation are important reasons for the inverted U-shaped impact of CSEP on CDT.

1. Introduction upgrading of the economic structure and achieve high-quality economic

Innovation is the primary driver of economic development, and the
Solow model shows that technological progress is the only source of
sustained economic growth. In recent years, the technological revolu­
tion represented by information and digital technology has injected new
momentum into economic development. The growth of the digital
economy has become an important driving force for developing coun­
tries, such as China, to achieve structural transformation, upgrade the
economy and avoid falling into the middle-income trap (Kharas & Kohli,
2011). Digital technology development and micro-corporate digital
transformation are closely related and inherently unified. On the one
hand, artificial intelligence, big data, mobile internet, cloud computing,
etc. provide solid technical support for the digital transformation of the
whole system of production, sales and management of corporations; on
the other hand, corporate digital transformation (CDT) further enriches
the form of digital innovation and extends the possibilities for applica­
tion of digital technology while improving operational efficiency.
Therefore, CDT has become a micro reflection of the development of the
digital economy. Digital transformation to stimulate the vitality of
business operations and cultivate competitiveness in the corporate
market coincides with real demand to promote the transformation and
development (Li, Han, Zeng, & Li, 2022).
Based on the impetus of transformation brought about by the
development of digital technology and the pressure of transformation
resulting from market competition, corporations are no longer facing the
problem of “whether to turn or not”, but “how to turn as soon as
possible”. It should be noted that there is still a significant gap between
the level of digital transformation of Chinese corporations and that of
developed countries (Zhou & Ma, 2022). Statistics show that only 25%
of corporations in China are digitally transformed, far lower than the
level in the United States (54%) and Europe (46%) (Qiu, 2020). In
October 2022, the International Data Corporation (IDC) released its
“Global Digital Transformation Spending Guide”, mentioning that the
global share of digital transformation spending in the United States and
Europe is close to 35% and 25%, respectively, higher than that in China.
The digital transformation strategy provides direction on how to
implement digital transformation (Matt, Hess, & Benlian, 2015). How­
ever, the lack of an effective strategy for some Chinese corporations
leads to ineffective transformations. According to Accenture’s newly
released “2021 China Enterprise Digital Transformation Index Study”,
only 16% of Chinese corporations have achieved significant trans­
formation results. In other words, the digital transformation of Chinese

* Corresponding author.
E-mail addresses: 16008@hbu.edu.cn (Y. Zhang), nnchx2020@163.com (X. Chen).

https://doi.org/10.1016/j.irfa.2023.102853
Received 19 April 2023; Received in revised form 20 July 2023; Accepted 1 August 2023
Available online 4 August 2023
1057-5219/© 2023 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-
nc-nd/4.0/).
Y. Zhang et al.
corporations seriously lags behind the real need for the development of
the digital economy (Liang & Li, 2023). In view of this, studies have been
conducted to explore the factors that drive the digital transformation of
companies based on both, internal perspectives, such as board and
management backgrounds (Davison, Wong, & Peng, 2023), and external
perspectives, such as fiscal policy (Chen & Yang, 2019; Liang & Li, 2023)
and financial development (Luo, 2022). Previous research provides
ideas for accelerating CDT, but the factors influencing it still need to be
further explored.
In recent years, equity pledge has become an important financial
innovation tool that has been rapidly developed and widely used in
China’s capital market. It has the advantages of easy approval and low
impact on control. Wind data shows as of March 9, 2021, there were
2521 listed corporations with pledged stocks in China, accounting for
approximately 59% of the number of listed corporations, of which
67.2% were pledged stocks by controlling shareholders. Although equity
pledges are personal behaviors of controlling shareholders independent
of the corporation, in the context of concentrated shareholdings in
Chinese corporations, controlling shareholders influence the corpora­
tion’ business decisions through the board of directors in order to
maintain control and personal benefits (Li, Wen, Zeng, & Liu, 2022).
Based on the assumption of transfer of control risk, the controlling
shareholder has a strong incentive to manage the market capitalization
to stabilize the share price after the pledge to avoid the loss of control
when the share price falls to the “closeout line”. It has been found that
corporations with the controlling shareholders’ equity pledge (CSEP)
may stabilize stock prices through information manipulation, such as
selective disclosure of information (Huang & Xue, 2016), tone manip­
ulation (Zhao, Zhang, Xiong, & Zou, 2019), or adjusting business stra­
tegies, such as reducing R&D investment (Amore, Schneider, &
Žaldokas, 2013) and increasing financial investment (Pang & Wang,
2020). From the above-mentioned adjustment of business strategies, the
pledge of equity will significantly change the investment of corporate
capital, especially in the current context of retail investors, who attach
more importance to short-term performance. To reduce the risk of
transfer of control, the controlling shareholder will force the corpora­
tion, through the board of directors’ channel, to invest its capital in
projects that can generate revenue in the short term. Digital trans­
formation is characterized by a long construction cycle, high capital
investment, and lagging returns that do not contribute to short-term
profit growth (Brynjolfsson, Rock, & Syverson, 2018; Liang & Li,
2023). It affects share price performance and defeats the purpose of
controlling shareholders to maintain control. Based on the separation-
of-powers hypothesis, the mismatch between control and cash flow
rights due to equity pledges can exacerbate the controlling shareholder’s
incentive to encroach, thereby inhibiting CDT by crowding out re­
sources. However, controlling shareholders are not naturally inclined to
harm the corporation’s benefits. Equity pledges under bona fide motives
will effectively meet the corporation’s capital needs (Huang, Li, & Zhao,
2022; Zhou, Li, Yan, & Lyu, 2021) and provide the necessary financial
support for CDT. This leads to the core question of this study: How does
CSEP affect CDT? Is it better to inhibit digital transformation of corpo­
rations based on preventing risky and misappropriation motives for
transfer of control or to increase the intensity of digital transformation of
corporations through effective financial support? However, the litera­
ture on this topic is limited.
The development of digital technology not only powers CDT in
general, but also accelerates the process of digital transformation in the
financial industry and gives rise to an emerging financial industry, such
as digital finance. The greatest advantage of digital finance is the
expansion of financial coverage by virtue of convenience and border­
lessness, thus absorbing scattered and small amounts of idle funds from
the original financial market and enriching its supply. Simultaneously,
digital finance provides more financing channels for corporations. The
technological innovation of digital finance expands the breadth and
depth of the original financial services and enriches the choice of
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International Review of Financial Analysis 90 (2023) 102853
financing channels for corporations (Xiong, Li, Xian, & Yang, 2023).
However, based on the embedding of technologies, such as the Internet
and big data, digital finance achieves accurate analysis and effective
screening of corporate information, thus forcing corporations to
improve the quality of information disclosure (Wen, Zhong, & Lee,
2022). This, in turn, can alleviate market information asymmetry and
improve the effectiveness of external supervision on this basis (Demer­
tzis, Merler, & Wolff, 2018). At the same time, higher quality of infor­
mation disclosure can effectively improve internal transparency, thus
creating conditions for the mutual control of the “Board of directors,
Board of supervisors, general meeting of shareholders, management,”
and improving the quality of internal control (Sama, Stefanidis, & Cas­
selman, 2022). The role of financial support and external governance
played by digital finance may influence the mechanism of the effect of
CSEP on CDT. Therefore, this study includes digital finance in the
analytical framework and explores its moderating effect on the
relationship.
Based on the theoretical analysis, this paper takes the data of China’s
A-share listed corporations from 2011 to 2021 as a sample for empirical
test. The results show that CSEP has an inverted U-shaped effect on CDT.
Digital finance plays a moderating role between CSEP and CDT. The
higher the development level of digital finance, the weaker the inhibi­
tory effect of CSEP on CDT. The sub-sample regression proves that the
motives for preventing control transfer risk and appropriation are
important reasons for the inverted U-shaped impact of CSEP on CDT.
Compared to previous studies, the possible contributions of this study
are as follows. First, there is little literature on the factors influencing
digital transformation within a corporation, and the question of how the
equity pledge behavior of controlling shareholders, as important inter­
nal stakeholders, affects CDT, remains to be answered. By analyzing the
mechanisms and effects of CSEP on CDT, this study not only enriches the
research on the factors influencing CDT but also provides evidence for
limiting the equity pledge ratio of controlling shareholders in China in
the future. Second, this study incorporates digital finance into the
analytical framework. This not only confirms the mechanism of the
impact of equity pledges on CDT by analyzing the moderating role of
digital finance, but also further enriches the research related to digital
finance. This study concludes that the higher the level of digital finance
development, the more effective it is in mitigating the negative impact of
equity pledges. This finding has a strong practical significance. It implies
that fully utilizing the synergies between digital finance and equity
pledges, is helpful in driving CDT. Third, with regard to the research
method, existing studies more often use the method of adding a
quadratic term to the equation to test the U-shaped (inverted U-shaped)
relationship between variables. Based on that, this study used the U test
to ensure robustness.
2. Theoretical analysis and research hypothesis
2.1. Analysis on the influence mechanism of CSEP on CDT
The issue of separation of two rights has been one of the core issues in
corporate governance. The change in cash flow rights after the equity
pledge is a significant cause of that. Cash flow rights have a positive
incentive effect. Its wealth effect and goal-oriented profitability of
controlling shareholders motivate them to strengthen the management
and supervision of the company. The encroachment effect is an oppor­
tunistic act committed by a controlling shareholder to the detriment of
corporate performance or the interests of minority shareholders. When
control rights are greater than cash flow rights, the capital controlled by
controlling shareholders is higher than that invested by them. Holding
control rights also means being able to freely dispose of the corpora­
tion’s excess capital, which provides opportunities and facilities for
personal benefits and greatly enhances the controlling shareholder’s
incentive to encroach. As the gap between cash flow rights and control
rights widens, the incentive effect gradually weakens, the encroachment
Y. Zhang et al.
effect gradually increases, and controlling shareholders’ motivation to
harm the interests of minority shareholders increases (Claessens, Djan­
kov, Fan, & Lang, 2002). When the incentive effect dominates, con­
trolling shareholders make decisions conducive to increasing corporate
value, such as improving the transparency of corporate information
disclosure, restraining opportunistic management behavior, and
improving investment efficiency. When the encroachment effect domi­
nates, controlling shareholders have a strong incentive to harm the in­
terests of minority shareholders through appropriation, connected
transactions, and surplus management. Overall, the degree of separation
of cash flow rights from control, changes the magnitude of the relative
power of the incentive and encroachment effects, thereby influencing
the behavior of large shareholders.
Controlling interests can generate many benefits for controlling
shareholders. First, controlling shareholders can use control to gain
control privately through related transactions and other means. Second,
under a strict IPO approval system, shell resources are highly valuable
(Zhou et al., 2021). In this context, controlling shareholders can make
significant gains by “selling the shell” (Amore et al., 2013). The potential
profitability and scarcity of control rights alert controlling shareholders
to the risks of transferring them. In particular, in the context of their
large and scattered number, and an inadequate protection mechanism
for their rights and interests under existing domestic laws, minority
shareholders are in an information-disadvantageous position. On the
one hand, it takes a lot of time and effort for small and medium share­
holders to search for relevant information; on the other hand, they lack
the relevant professional knowledge to analyze the information accu­
rately. In this case, controlling shareholders are more inclined to
manage market value by selectively disclosing positive news, concealing
negative news, or changing investment decisions to weaken the risk of a
control transfer.
Corporate digital transformation (CDT) is characterized by the three
interrelated characteristics of long construction cycles, high capital in­
vestment and lagging benefit. There has been much controversy
regarding whether CDT can improve corporate productivity and per­
formance. The Nobel Laureate in economics, Jean-Pierre Solow, once
proposed that “computers are everywhere except in productivity sta­
tistics,” the famous “Solow’s paradox.” Solow’s paradox argues that IT
does not significantly contribute to productivity or performance
(Watanabe, Tou, & Neittaanmäki, 2018). Implementation and reorga­
nization lags have been identified as important reasons for the emer­
gence of Solow’s paradox. In other words, the productivity-enhancing or
performance-enhancing effects of new technologies do not fully emerge
until a sufficient stock of technologies has accumulated or the necessary
complementary systems have been constructed (Brynjolfsson et al.,
2018; Cardarelli & Lusinyan, 2015). The complementary mechanism
theory states that in the process of micro-individual information
improvement, the ability of human capital, business strategy, and
organizational structure to form a complementary system with infor­
mation technology has an important impact on the empowering effect of
information technology (Milgrom & Roberts, 1990).
Based on the above analysis, we believe that CDT has the following
characteristics. (1) Long construction period. Digital transformation
involves the entire field of corporate sales, management, and operation.
A complementary system is formed through organizational restructuring
and human capital accumulation in order to achieve digital technology
empowerment. This process requires long-term accumulation. There­
fore, the CDT cannot be achieved overnight. (2) Significant capital in­
vestment. This is because corporate digitalization is an all-round and
system-wide transformation process. It involves both the absorption
and application of digital technology, and the construction of a corre­
sponding complementary system. Therefore, the amount of capital
required for the transformation process is relatively large. (3) Benefit
lag. CDT needs to form sufficient technology stock and a perfect com­
plementary system to realize an empowering effect on corporations.
Therefore, CDT in the same year may not immediately show the
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International Review of Financial Analysis 90 (2023) 102853
corresponding dividend effect. It has been found that, in the short term,
IT investment does not significantly contribute to productivity
improvement and even has a certain inhibitory effect, but in the long
term, it will effectively improve corporate productivity (Bresnahan,
Brynjolfsson, & Hitt, 2002).
Combined with Fig. 1, the impact of CSEP on the CDT is analyzed as
follows. When the pledge ratio of controlling shareholders is low, the
separation of cash flow rights and control rights is light. At this time, the
incentive effect of cash flow rights dominates. The interests of control­
ling shareholders are aligned with those of small and medium-sized
shareholders, and the incentive to encroach is weaker. At the same
time, the controlling shareholder has sufficient funds to cope with the
risk of additional guarantees and forced liquidation due to the decline in
share prices, and the risk of the transfer of control is lower. Under the
influence of a stronger incentive effect and weaker control transfer risk,
controlling shareholders tend to invest in projects that benefit the long-
term development of the corporation (Zhou et al., 2021). Although
digital transformation is characterized by a long construction period,
high investment capital and lagging revenue, it is inevitable for corpo­
rations to achieve transformation and upgrading, gain competitive
advantage and improve long-term operational efficiency in the context
of rapid development of the digital economy (Kharas & Kohli, 2011).
Therefore, when the equity pledge ratio is low, most controlling share­
holders invest the funds obtained from the equity pledge into digital
transformation, which is beneficial to the long-term development of
corporate based on bona fide motives. As the scale of funds obtained by
controlling shareholders increases with a rise in the equity pledge ratio,
the intensity of digital transformation also gradually increases at this
stage. Further increase in the equity pledge ratio intensifies the degree of
separation of the two rights of the controlling shareholders, that is, cash
flow and control rights, thus strengthening the controlling shareholder’s
incentive to encroach and weakening the incentive effect. When the
proportion of equity pledges reaches a certain level, the encroachment
effect is dominant, which will lead to the “emptying” behavior of major
shareholders. The controlling shareholders will absorb part of the funds
due to the encroachment motive, squeezing out the available resources
for the digital transformation of corporations. From another perspective,
an increase in the proportion of equity pledges further exacerbates the
risk of transfer of control, triggering more harm than good for control­
ling shareholders. Therefore, preventing the transfer of control is a top
priority. To reduce the risk of control transfer, the controlling share­
holder will force the company to invest capital in those projects that can
generate revenue in the short term, rather than in digital transformation,
which is characterized by long construction cycles, high capital
Fig. 1. Mechanism analysis.
Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

investment, and lagging revenue. With an increase in the equity pledge 2011 to 2021 were selected as the sample for this study. We processed
ratio, the controlling shareholders’ motivation to encroach and prevent the data as follows. (1) Financial and insurance corporations were
the risk of control transfer will gradually increase. On this basis, the removed. This is because their financial statements differ from those of
intensity of digital transformation is continuously weakened. Therefore, other industries. (2) Gearing ratios >1 and ST, *ST, and PT samples were
we propose hypothesis as follows: excluded. (3) Corporations with IPO in the current year were excluded.
(4) Samples with missing key variables were excluded. (5) A 1% win­
Hypothesis 1. There is an inverted U-shaped relationship between
sorization treatment was performed on both ends of the control vari­
CSEP and CDT.
ables for the continuous type. The final sample size obtained was
26,700. The data used in this study were obtained primarily from the
2.2. Analysis of the moderating mechanism of digital finance
CSMAR database. The CDT data were analyzed using Python technology
for relevant keywords in the annual reports of listed companies.
Digital technology has driven the development and growth of digital
finance, while powering CDT. Digital finance influences the intrinsic
3.2. Variable definition
mechanism of CSEP and CDT by alleviating financing constraints and
playing a governance role, thus regulating the relationship between the
3.2.1. Dependent variable
two. First, the information and capital financing functions of digital
Corporate Digital Transformation (CDT). Some scholars use aggre­
finance improve the financing environments of corporations. It im­
gate corporate annual report information to construct dummy variables
proves the breadth and depth of the original financial services through
to determine if a corporation has undergone digital transformation
innovation in the business and service model of digital finance, which
(Peng & Tao, 2022). However, this approach does not accurately reflect
not only expands financial coverage and effectively absorbs idle social
the intensity of the transformation. Other scholars have assessed the
capital, but also enriches the choice of financing channels for corpora­
level of CDT by the amount of investment in digital transformation, but
tions (Li, Han, et al., 2022; Xiong et al., 2023). Digital finance has the
the above data are from questionnaires and are difficult to obtain from
characteristics of low threshold and convenience. The emergence of the
corporations’ annual reports (Cheng, Zhou, & Li, 2023). Annual
new financial industry has changed the competition pattern of tradi­
corporate reports are important vehicles for reflecting the strategic
tional financial institutions, continuously promoting them to sink their
management and business philosophy of a corporation. An analysis of
target groups and improve their products and services (Wen et al., 2022;
vocabulary usage in annual reports can determine the extent to which a
Xiong et al., 2023). Based on the effects of “incremental expansion” and
company focuses on a particular area (Wu, Hu, Lin, & Ren, 2021).
“stock optimization,” digital finance can effectively improve credit
Therefore, it is scientific and feasible to measure the intensity of CDT by
resource mismatches and alleviate corporate financing constraints.
selecting keywords and using text-mining methods.
Digital financing provides sufficient financial support for CDT, which
The specific measurement methods are as follows: We referred to the
requires a large amount of capital. More importantly, digital finance can
practices of related scholars and used Python techniques to collect and
effectively meet the capital demand for additional guarantees or early
organize the annual reports of listed companies (Wu et al., 2021). The
redemption of equity faced by controlling shareholders after the pledge
Java PDFbox library was used to extract all the text content and form a
of their equity, mitigating the risk of control transfer to a certain extent.
data pool. According to Wu et al.’s study (Wu et al., 2021), the data
Second, the information function of digital finance effectively reduces
extraction can be divided into three steps. First, five primary dimensions
the search cost of information-seekers, improves the transparency of
were set: artificial intelligence technology, big data technology, block­
corporate information, alleviates the information asymmetry problem
chain technology, cloud computing technology, and digital technology
between corporations and other subjects, such as banks and investors,
applications, with a certain number of keywords identified for each of
and creates a good information environment (Wen et al., 2022). Based
them. The specific keyword selection is detailed in Table A1 in Appendix
on this, the effectiveness of external monitoring will be effectively
A. Second, the keywords in the above data pool were searched, and word
improved, and external monitoring through the media, government, and
frequency counts were obtained using Python. Third, we summed the
small and medium-sized investors will be an effective check on the self-
word frequency counts and calculated their logarithms. It is important to
interested behavior of decision makers (Dyck, Volchkova, & Zingales,
note that this approach only measures the intensity of CDT for the year,
2008). Strengthening corporations’ internal transparency creates con­
not the stock or cumulative amount of CDT.
ditions for improving their internal governance (Sama et al., 2022; Wen
et al., 2022). The governance effect of digital finance restrains control­
3.2.2. Core independent variable
ling shareholders’ encroachment motives and limits short-selling
Controlling shareholder’s equity pledge (CSEP). In this paper, we
behavior. Overall, the financial support and external governance ef­
refer to the existing literature (Amore et al., 2013; Zhou et al., 2021) and
fects based on digital finance, weaken the disincentive effect on corpo­
use the ratio of the number of shares pledged by controlling share­
rations’ digital transformation when the equity pledge ratio is high.
holders to the number of shares held by controlling shareholders at the
Therefore, we propose hypothesis as follows:
end of the year to measure the ratio of CSEP.
Hypothesis 2. The development of digital finance affects the rela­
tionship between CSEP and CDT. 3.2.3. Moderating variable
Development level of Digital financial (DF). In this study, we use the
3. Study design “Peking University Digital Financial Inclusion Index (2011-2021),”
jointly compiled by the Peking University Digital Finance Research
3.1. Data sources Center and Ant Group Research Institute, to measure the development
level of regional digital finance, with reference to existing studies (Wen
Mature development of digital technology is the foundation of CDT. et al., 2022; Xiong et al., 2023). The index consists of three dimen­
Since 2011, digital technology has seen a climax in development and sions–breadth of coverage, depth of use, and degree of digitization–and
application. Numerous internet corporations have launched new prod­ covers data at the provincial, municipal, and county levels (Guo et al.,
ucts and services using big data and other technologies, providing useful 2020). It should be noted that this study uses the digital finance index of
models for enterprises to learn from in advancing digital transformation. the province in which the enterprise is registered to match the
At the same time, the time range of the data on the development level of corporation.
digital finance for the moderating variable was considered to be
2011–2021. Therefore, the data on A-share listed corporations from

4
Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

3.2.4. Control variables Table 1

We refer to existing studies and select the control variables as fol­ Descriptive statistics.
lows: (1) Enterprise size (SIZE). Considering that taking the logarithm of Variables Obs. Mean Std dev. Min Max
total assets at the end of the year may lead to covariance in the control
CDT 26,700 1.3867 1.3985 0.0000 6.3008
variables selected in this study, the logarithm of the number of em­ CSEP 26,700 0.2365 0.3307 0.0000 1.0000
ployees +1 was used as a proxy variable for enterprise size. (2) Gearing DF 26,700 278.0464 105.3779 16.2200 458.9704
ratio (LEV). Ratio of total liabilities to total assets at the end of a SIZE 26,700 7.7386 1.2596 2.0794 13.2228
financial year. (3) Growth capacity (GROWTH). Measured by the growth LEV 26,700 0.4158 0.1986 0.0540 0.8686
GROWTH 26,700 0.1764 0.4076 − 0.5740 2.7436
rate of business revenue. (4) Tobin’s Q (TOBINQ). This is calculated TOBINQ 26,700 2.0777 1.3465 0.8627 9.0714
using the following formula: (market value of outstanding shares + ROA 26,700 0.0414 0.0644 − 0.2699 0.2363
number of non-marketable shares × net assets per share + book value of OC 26,700 0.3411 0.1477 0.0852 0.7402
liabilities)/total assets. (5) Profitability (ROA). It is measured by the BAL 26,700 0.7448 0.6243 0.0000 4.0000
BI 26,700 0.3761 0.0559 0.1429 0.8000
return on total assets. (6) Concentration of equity (OC). It is measured by
DUAL 26,700 0.2809 0.4495 0.0000 1.0000
the ratio of the number of shares held by the largest shareholder to the BIG 26,700 0.0575 0.2329 0.0000 1.0000
total number of shares. (7) Equity balance (BAL). It is measured by the
ratio of the sum of the shareholding of the second to fifth largest
shareholders to that of the largest shareholder. (8) Board Independence that the controlling shareholder of the sample enterprise has not pledged
(BI). It is measured by the ratio of independent directors to total di­ the equity. The maximum value is 1, which indicates that the controlling
rectors. (9) Two positions in one (DUAL). Denoted by 1 if the chair­ shareholder of the sample enterprise has pledged all the shares. The
person and general manager are the same person; otherwise, 0. (10) Big average value of digital finance is 278.0464, and the minimum value is
Four Audits (BIG). Takes the value of 1 if the corporation’s annual report 16.2200, which means that the development level of digital finance in
is audited by a Big Four accounting firm, and 0, otherwise. the region is low. The maximum value is 458.9704, which means that
the new financial formats in the region have strong vitality for
development.
3.3. Model setting

This study argues that there is an inverted U-shaped relationship
between CSEP and CDT. To test this hypothesis, we first conduct the
Hausman test, F-test, and joint significance test of annual variables. The
Hausman test showed that χ 2 =676.60 (P = 0.00), indicating that the
fixed-effects model outperformed the random-effects model. The results
of the F-test showed F = 18.43 (P = 0.00), indicating that the fixed-
effects model outperformed the mixed regression model. The results of
the joint significance test of annual variables show that F = 174.84 (P =
0.00), indicating that the original hypothesis of “no time effect” should
be rejected. Thus, the model was constructed as follows:
CDT i,t = Cons + α1 CSEPi,t + γCV + μi + ωt + εi,t
CDT i,t = Cons + β1 CSEPi,t + β2 CSEP2i,t + γCV + μi + ωt + εi,t
In Eqs. (1) and (2), subscripts i and t represent company i and time t,
respectively. Cons is a constant term. CDTi,t is the digital transformation
intensity of corporation i in year t. CSEPi,t is the controlling share­
holder’s equity pledge ratio of corporation i in year t. CV is the set of
control variables. μi is an individual fixed effect. ωt is a time fixed effect.
εi,t is a disturbance term that follows a standard normal distribution. To
test the hypotheses, regression is first conducted on the full sample using
Eq. (1), followed by regression on the full sample using Eq. (2). If both
β1 and β2 pass the significance test and the goodness of fit of the regres­
sion of Eq. (2) increases compared to Eq. (1), it indicates that the rela­
tionship between CSEP and CDT is not purely linear. If β2 is negative and
β1 is positive, the effect of CSEP on CDT is considered to be an inverted U-
shape, and the hypothesis of this study holds.
3.4. Descriptive statistics
The descriptive statistics for each variable are presented in Table 1.
The mean value of CDT is 1.3867, standard deviation is 1.3985, mini­
mum value is 0, and maximum value is 6.3008. This shows that there is a
significant gap in the intensity of CDT. Fig. 2 shows the mean value of
CDT in each year. It can be found that since 2011, the mean value of CDT
has increased year by year, from 0.49 to 1.89, and corporations are
paying more and more attention to digital transformation. Among them,
the growth rate was faster from 2011 to 2015, with an average annual
growth rate of 26.88%. The mean value of the CSEP is 0.2365, the
standard deviation is 0.3307. The minimum value is 0, which indicates
4. Empirical results and analysis
4.1. The impact of controlling shareholders’ equity pledges on corporate
digital transformation
First, considering the large number of control variables selected for
this study, the explanatory variables were tested for variance inflation
factors (VIF). The test results showed that the maximum variance
inflation factor of each variable was 2.09 and the average variance
inflation factor was 1.36, indicating that there was no serious covariance
problem among the variables.
(1) In addition, to test the hypotheses, regressions were conducted on
the full sample using Eqs. (1) and (2). In this study, control variables and
(2) time-fixed effects were gradually added to the regressions, and the re­
sults of the above regressions were presented simultaneously. Simulta­
neously, the regression results were corrected using robust clustering
standard errors. Table 2 shows the results of the study.
In Table 2, the joint significance test of the equations indicates that
the model has strong explanatory power. Columns (1)–(3) show the
results of the regression on the full sample using Eq. (1). Column (3)
shows the results of the regression, including the control variables with
time effects. The estimates show that the coefficient of CSEP passes the
significance test and has a positive value. Columns (4)–(6) show the
results of the regression on the full sample using Eq. (2). Column (4)
shows the regression results without the inclusion of control variables
with time-fixed effects, revealing that the coefficient of CSEP is signifi­
cantly positive and the coefficient of CSEP2 is significantly negative.
Column (5) shows that the significance and sign of the coefficients on
CSEP and CSEP2 do not change significantly after adding the control
variables. Column (6) shows the regression results for the additional
time-fixed effects. The estimates show that the coefficient value of CSEP
is 0.2811 (at the 1% significance level) and the coefficient value of
CSEP2 is − 0.2415 (at the 5% significance level). Comparing the good­
ness of fit, we can see that the goodness of fit of the regression after
adding CSEP2 is higher than when CSEP2 is not added. Therefore, the
impact of CSEP on CDT is not linear and an inverted U-shaped rela­
tionship exists between the two. Thus, hypothesis 1 in this study is
verified.
We calculate the inflection point value of the inverted U-shaped
curve between the ratio of CSEP and the intensity of CDT based on the
regression results in Column (6). The calculations show that the

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Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

Fig. 2. The mean value of CDT in each year.

Table 2
Impact of CSEP on CDT.
Variables (1) (2) (3) (4) (5) (6)

0.3571*** 0.2433*** 0.0711** 1.0628*** 0.7677*** 0.2811***

CSEP
(0.0411) (0.0381) (0.0323) (0.1171) (0.1072) (0.0908)
− 0.8144*** − 0.6046*** − 0.2415**
CSEP2
(0.1225) (0.1134) (0.0962)
0.4325*** 0.1767*** 0.4262*** 0.1750***
SIZE
(0.0246) (0.0203) (0.0246) (0.0203)
0.0797 0.1467* 0.0785 0.1455*
LEV
(0.1054) (0.0860) (0.1051) (0.0860)
0.0049 0.0269** 0.0053 0.0270**
GROWTH
(0.0145) (0.0132) (0.0145) (0.0132)
0.0290*** 0.0115 0.0282*** 0.0115
TOBINQ
(0.0072) (0.0075) (0.0072) (0.0075)
− 0.4955*** 0.1685 − 0.5296*** 0.1525
ROA
(0.1394) (0.1236) (0.1390) (0.1232)
− 2.7673*** − 0.5822*** − 2.7576*** − 0.5847***
OC
(0.2134) (0.1816) (0.2129) (0.1814)
− 0.0812** 0.0165 − 0.0774** 0.0177
BAL
(0.0394) (0.0323) (0.0393) (0.0323)
0.1817 − 0.5545*** 0.1686 − 0.5577***
BI
(0.2065) (0.1709) (0.2062) (0.1708)
− 0.0250 − 0.0098 − 0.0261 − 0.0102
DUAL
(0.0270) (0.0237) (0.0269) (0.0237)
0.1643** 0.0177 0.1700** 0.0204
BIG
(0.0718) (0.0669) (0.0720) (0.0669)
1.3022*** − 1.1583*** − 0.4621** 1.2699*** − 1.1305*** − 0.4544**
Constant
(0.0097) (0.2315) (0.1894) (0.0112) (0.2310) (0.1891)
Individual effects Yes Yes Yes Yes Yes Yes
Time effects No No Yes No No Yes
Obs. 26,700 26,700 26,700 26,700 26,700 26,700
Intra-group goodness of fit 0.0095 0.1266 0.3101 0.0138 0.1386 0.3305

Note: ***, **, * represent significant at 1%, 5%, 10% confidence level, respectively. () are clustering robust standard errors.

inflection point value is 0.5820. When the ratio of CSEP is lower than
0.5820, the controlling shareholder still retains a high cash flow right.
The incentive effect created by the cash flow rights is dominant, and the
concern about the risk of control transfer is relatively small. With an
increase in the equity pledge ratio, the controlling shareholder will use
more funds for the digital transformation that can promote the long-
term development of the enterprise. At this time, the intensity of the
CDT increases with a rise in the ratio of CSEP. When the ratio of CSEP is
higher than 0.5820, the incentive effect generated by the cash flow right
is relatively weak, and the encroachment effect caused by the separation
of two rights dominates. Under the excessive equity pledge ratio, the
controlling shareholders do not have sufficient self-owned shares to cope
with the possible demand for position replenishment. Therefore, their
motive of managing market value is more obvious. They may invest
more funds in projects that can obtain short-term income. At this time,
the intensity of CDT gradually decreases with the increase of the ratio of
CSEP. Statistics show that a total of 5061 observations in this sample are
greater than the critical value, accounting for about 18.96%. This proves
that there is a phenomenon of excessive equity pledging by controlling
shareholders of some corporations in China’s capital market, resulting in
the proportion of equity pledges exceeding the critical value. It means
that a stage has been reached that inhibits the CDT.
4.2. Endogeneity treatment and robustness test
4.2.1. Dynamic panel model
The aforementioned benchmark regression demonstrates an inverted
U-shaped relationship between CSEP and CDT. But it may have certain
endogeneity problems, leading to inconsistent estimation results. In
view of this, this study refers to existing studies (Kim, Li, & Zhang,
2011), uses a dynamic panel model for the regression, and constructs the
model as follows:
CDT i,t = Cons + ρ1 CDT i,t− 1 + β1 CSEPi,t + β2 CSEP2i,t + γCV + μi + ωt + εi,t
(3)
In Eq. (3), the meanings of the symbols are the same as those used in previous literature.

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Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

The advantages of using a dynamic panel model for regression are as follows. First, although
certain control variables are selected, the factors that may affect the intensity of CDT are not
fully controlled because of data availability and model simplification, and omitted variables
are an important cause of endogeneity problems. CDTi,t-1 is the dependent variable lagged by
one period and contains information on certain omitted variables. Therefore, its inclusion in
the model effectively alleviates the endogeneity problem caused by omitted variables (Arellano
& Bond, 1991). Second, the dynamic panel model allows the specification of endogenous
variables and uses lagged values as instrumental variables to obtain consistent estimates. In
2
this study, both CSEP and CSEP were considered endogenous variables. Third, there may have
been some inertia effects on the CDT. In other words, the digital transformation intensity of the
previous period may have an impact on the current period, however, this can be effectively
overcome using a dynamic panel model.
The commonly used estimation methods for dynamic panel models are differential GMM
and systematic GMM. In comparison, systematic GMM can improve estimation efficiency, and
the estimated coefficients are not affected by weak instrumental variables. Therefore, we use a
two-step systematic GMM to estimate the above model. The use of a systematic GMM requires
that the following conditions be met: (1) There is autocorrelation of the perturbation terms,
but not of the second order or higher. (2) The instrumental variables are exogenous. Therefore,
serial correlations and Sargan tests are required. The results of the serial correlation test show
that the nuisance terms satisfy the requirements of first-order autocorrelation and second-order
uncorrelation, and the Sargan test shows that the instrumental variables are valid (the cor­
responding probability value of the Sargan test is 0.108). The regression results are presented
in Table 3. The results in column (1) of Table 3 show that the coefficient of CSEP is
2
significantly positive and the coefficient of CSEP is significantly negative. Controlling for
endogenous problems and inertia effects, it is still possible to demonstrate an inverted U-
shaped relationship between the ratio of CSEP and the intensity of CDT.
4.2.2. Lagged explanatory variables
The impact of CSEP on CDT may take some time, and to avoid
endogeneity problems due to mutual causality as much as possible, the
explanatory variables are regressed again with a lag of one period, and
the results are shown in Table 3. The results in column (2) of Table 3
indicate an inverted U-shaped relationship between the ratio of CSEP
and the intensity of the CDT, and the previous findings remain robust.
4.2.3. Tobit model
The explanatory variables selected in this study all take values
greater than or equal to zero and belong to left-truncated tail data.
Therefore, this study uses the Tobit model for regression, and the results
are presented in Table 3. The results in column (3) of Table 3 show that
the previous conclusion holds when the Tobit model is used.
4.2.4. Subsample regression
The results above show that the CSEP has an inverted U-shaped effect
on the CDT, and the inflection point value is 0.5820. In order to further
confirm this conclusion, we divided the whole sample into two sub-
samples according to the inflection point value: the CSEP is high
(CSEP ≥ 0.5820) and the CSEP is low (CSEP < 0.5820). Then, we
performed regressions using Eqs. (1) and (2), respectively. The results
are shown in columns (4)–(7) in Table 3. In Table 3, columns (4) and (5)
are listed as regression results of sub-samples (CSEP ≥ 0.5820). It can be
found that the coefficient of CSEP in column (4) is significantly negative
at the 5% statistical level. But after CSEP2 is added to column (5), the
coefficients of CSEP and CSEP2 are no longer significant. This indicates
that when the CSEP exceeds the inflection point value, the intensity of
CDT decreases with the increase of CSEP. Columns (6) and (7) show the
regression results of the subsample with low (CSEP < 0.5820). It can be
found that the coefficient of CSEP in column (6) is significantly positive
at the 5% statistical level, and the coefficient of CSEP2 in column (7) is
not significant. To ensure robustness, we used Chow test to compare the
significance of the coefficient differences in columns (4) and (6). The
results showed that the coefficient differences between groups were
significant (P value of Chow test was 0.004). This proves that when the
proportion of equity pledge is lower than the inflection point, there is a
significant positive correlation between the CSEP and the CDT. The
above results prove that the baseline regression conclusions are reliable,
and there is indeed an inverted U-shaped relationship between CSEP and
CDT.
4.2.5. U test
Existing studies commonly include the squared terms of explanatory
variables in the regression model when testing for U-shaped (inverted U-
shaped) relationships between variables. However, this practice may
cause a convex (concave) to the origin, but a monotonic relationship, to
be incorrectly discriminated as a U-shaped (inverted U-shaped) rela­
tionship (Lind & Mehlum, 2010). In view of this, a U test was conducted
in this study to further verify the inverted U-shaped relationship be­
tween the ratio of CSEP and the intensity of CDT. The results show a t-
statistic of 1.79, corresponding to a probability of 0.0367. Therefore, the
original hypothesis is rejected at a 5% significance level. Because the
slope interval contains negative values, it again proves the existence of
an inverted U-shaped relationship between the CSEP ratio and the CDT
intensity.
5. Impact mechanism test
5.1. Analysis of the moderating effects of digital finance
Combined with the mechanism analysis above, the moderating effect
of the level of digital finance development may take the form of
changing the inflection point of the inverted U-shaped curve between
CSEP and CDT, or changing the shape of the relationship between the
two. Therefore, this study uses a subsample regression to test the
moderating effect of digital finance. Specifically, the full sample is
divided into three subsamples of high (DF≧336.65), medium (336.65 >
DF≧237.53), and low (237.53 > DF) digital finance development level

Table 3
Endogeneity treatment and robustness test.
Variables (1) (2) (3) (4) (5) (6) (7)

CSEP≥0.5820 CSEP≥0.5820 CSEP < 0.5820 CSEP < 0.5820

0.6634***
L.CDT
(0.0174)
0.6849*** 0.2895*** 0.3250*** − 0.2804** 1.9550 0.1337** 0.3128*
CSEP
(0.1967) (0.0922) (0.0899) (0.1143) (1.4070) (0.0566) (0.1809)
− 0.5772*** − 0.2989*** − 0.2359** − 1.3714 − 0.3764
CSEP2
(0.2114) (0.0958) (0.0981) (0.8576) (0.3523)
− 0.5598*** − 0.4789** − 1.7375*** − 0.1641 − 1.0437 − 0.5151** − 0.5133**
Constant
(0.2126) (0.2001) (0.1368) (0.4252) (0.7181) (0.2172) (0.2172)
Control variables Yes Yes Yes Yes Yes Yes Yes
Individual effects Yes Yes Yes Yes Yes Yes Yes
Time effects Yes Yes Yes Yes Yes Yes Yes
Obs. 22,577 22,577 26,700 5061 5061 21,639 21,639
Goodness of fit 0.2740 0.2740 0.2740 0.2378 0.2384 0.3146 0.3147

Note: ***, **, * represent significant at 1%, 5%, 10% confidence level, respectively. () are clustering robust standard errors.

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Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

according to the trichotomies of the development level of digital finance.
Then, we regressed each subsample using Eqs. (1) and (2). The regres­
sion results are shown in Table 4. The regression results without the
inclusion of control variables and time effects are not presented because
of spatial limitations.
In Table 4, columns (1) and (2) present the regression results for the
subsample with a lower level of digital financial development. The co­
efficient of CSEP is not significant when CSEP2 is not included in column
(1), and the coefficient of CSEP is significantly positive at the 5% level
and the coefficient of CSEP2 is significantly negative at the 5% level
when CSEP2 is included in column (2). This indicates an inverted U-
shaped relationship between CSEP and CDT when the development level
of digital finance is low. Columns (3) and (4) show the regression results
for the subsample pertaining to medium digital finance development
level. The coefficient of CSEP is significantly positive, with a value of
0.1075, when CSEP2 is not added to Column (3). The coefficients of CSEP
and CSEP2 fail the significance test when CSEP2 is added to Column (4).
The above results demonstrate that for the subsample showing medium
digital financial development, there is a linear relationship between
CSEP and CDT, indicating that the larger the ratio of CSEP, the higher
the intensity of CDT. Columns (5) and (6) show the regression results for
the subsample with higher digital financial development levels. Column
(5) shows that the coefficient of CSEP is significantly positive. The co­
efficients of CSEP and CSEP2 fail the significance test after adding CSEP2
to column (6). This indicates a significant positive relationship between
CSEP and CDT under the condition of a high level of digital finance
development. Thus, hypothesis 2 in this paper is verified.
Comparing the regression results of the three subsamples, we find
that the effect of CSEP on CDT remains inverted and U-shaped when the
level of digital finance development is low. In other words, the pro­
portion of CSEP is positively related to the intensity of CDT before the
critical value. However, it inhibits CDT beyond the critical value. As its
development level increases and enters the medium stage, the gover­
nance role of digital finance in corporations and the alleviation of
financing constraints gradually increase. At this time, CSEP no longer
has an inhibiting effect on the digital transformation of corporations, but
only promotes CDT. With further development of digital finance, the
dividend effect becomes increasingly obvious. By comparing the coef­
ficient values of CSEP in columns (3) and (5), it can be seen that the
marginal effect of CSEP to promote CDT is greater for the subsample
with high compared to medium level of digital finance development. To
ensure robustness, Chow test was used to compare whether the co­
efficients in columns (3) and (5) were significantly different. The results
showed that the P value of Chow test was 0.025, which could be
considered as a significant difference between the coefficients at the 5%
statistical level. In conclusion, digital finance weakens the negative
motivations of controlling shareholders due to equity pledges (motiva­
tion to prevent control transfer risk and appropriation motivation)
through financial support and external governance effects. Both of
which are important reasons for equity pledges to inhibit CDT. There­
fore, once the development of digital finance reaches a certain stage,
CSEP exerts a purely facilitating effect on CDT. The above findings
reveal that we should further promote the development of digital
finance in the future so that the two different financing channels, digital
finance and equity pledges, can form a synergy to help CDT.
5.2. Motivation to prevent the risk of transfer of control
The mechanism analysis suggests an inverted U-shaped relationship
between controlling shareholder equity pledge (CSEP) and corporate
digital transformation (CDT). In other words, when the equity pledge
ratio exceeds a critical value, CSEP inhibits CDT. Part of the reason for
this is that an increase in the equity pledge ratio exacerbates the risk of
control transfer. When the ratio of CSEP exceeds the critical value, the
controlling shareholders’ concern about the risk of control transfer
dominates and strengthens their motive for managing market capitali­
zation when they focus more on investment projects that can generate
short-term income, rather than on digital transformation. When the
stock price continues to fall, the risk of control transfer increases
significantly. From this perspective, we can reasonably speculate that
this risk is greater when the risk of collapse of the stock price of the
sample corporations is higher. At this time, the inhibitory effect of CSEP
on CDT occurs earlier, which means that the inflection point shifts to the
left. This study draws on existing analyses (Kim et al., 2011) to measure
the risk of collapse of individual stock prices by the negative return
skewness coefficient (NRSC), which is calculated as follows.
[ ∑ ]/[ ( ∑ )3/2 ]
NRSCi,t = − ρ(ρ − 1)3/2 e3i,t (ρ − 1)(ρ − 2) e2i,t (4)
In the above equation,ρrepresents the number of trades of the stock
( )
in a year.ei,t (ei,t = Ln 1 + εi,t ) represents the return on stock i in year t.
εi,t is the residual obtained from the regression using Eq. (5):
Ri,t = Cons + θ1 Rm,t− 2 + θ2 Rm,t− 1 + θ3 Rm,t + θ4 Rm,t+1 + θ5 Rm,t+2 + εi,t (5)
In the above equation, Ri,t is the return on stock i in week t, consid­
ering reinvestment in cash dividends. Rm,t is market portfolio m
weighted by market capitalization in week t.
After obtaining the negative return skewness coefficient using the
formula above, the mean negative return skewness coefficient, for each
industry for each year, was calculated. If the negative return skewness
coefficient of the sample companies is greater than the annual industry
mean, the price of individual stocks is considered to be at greater risk of
collapse, and vice versa. Regressions are then conducted separately for
the two subsamples, and the results are shown in Table 5. Columns (1)
and (2) in Table 5 show the regression results for the subsample with a
higher risk for stock price crash. Column (1) shows the regression results
without adding CSEP2 and column (2) with the addition of CSEP2. The
coefficient of CSEP is significantly positive and the coefficient of CSEP2 is

Table 4
Tests of the moderating effect of digital financial.
Variables 237.53 > DF 336.65 > DF≥237.53 DF≥336.65

(1) (2) (3) (4) (5) (6)

0.0384 0.3158** 0.1075** 0.0176 0.1178** 0.0758

CSEP
(0.0471) (0.1332) (0.0444) (0.1325) (0.0575) (0.1357)
− 0.3189** 0.0987 0.0497
CSEP2
(0.1439) (0.1358) (0.1433)
0.3802 0.3931 0.0333 0.0344 0.0043 0.0069
Constant
(0.2645) (0.2638) (0.3521) (0.3522) (0.4209) (0.4207)
Control variables Yes Yes Yes Yes Yes Yes
Individual effects Yes Yes Yes Yes Yes Yes
Time effects Yes Yes Yes Yes Yes Yes
Obs. 8896 8896 8784 8784 9020 9020
Intra-group goodness of fit 0.1987 0.1996 0.1081 0.1072 0.1023 0.1023

Note: ***, **, * represent significant at 1%, 5%, 10% confidence level, respectively. () are clustering robust standard errors.

8
Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

Table 5 sample into two subsamples and conducts separate regressions. The
Tests of motives to prevent the risk of transfer of control. results are summarized in Table 6.
Variables High risk of stock price Low risk of share price Column (1) in Table 6 shows the results of the full-sample regression;
collapse collapse the coefficient of CSEP does not pass the significance test. Column (2)
(1) (2) (3) (4) presents the regression results for the subsample with a high proportion
of equity pledges. It is observed that the coefficient of CSEP passes the t-
0.0546 0.2699** 0.0798* 0.2798**
CSEP
(0.0421) (0.1228) (0.0420) (0.1200)
test at the 5% significance level and has a positive value. This indicates
− 0.2459* − 0.2315* that the controlling shareholders’ appropriation behavior becomes more
CSEP2
(0.1331) (0.1259) serious as the ratio of equity pledges increases, after the threshold value
− 0.5123** − 0.5073** − 0.3772 − 0.3669 (0.5820) is exceeded. Column (3) shows the regression results for the
Constant term
(0.2215) (0.2212) (0.2598) (0.25936)
lower subsample of the equity pledge ratio. The coefficient of CSEP does
Control variables Controlled Controlled Controlled Controlled
Individual effects Controlled Controlled Controlled Controlled not pass the significance test, although it is positive. The above results
Time effects Controlled Controlled Controlled Controlled indicate that the encroachment behavior of controlling shareholders
Obs. 14,076 14,076 12,624 12,624 occurs when the equity pledge ratio is high. The deepening separation of
Intra-group goodness of the two rights motivates for the encroachment of controlling share­
0.3129 0.3132 0.3152 0.3156
fit
holders’ interests, and their capital appropriation crowds out the in­
Note: ***, **, * represent significant at 1%, 5%, 10% confidence level, respec­ ternal resources available for digital transformation to a certain extent,
tively. () are clustering robust standard errors. thus inhibiting CDT. However, when the equity pledge ratio is low,
higher cash flow rights enable controlling shareholders and small and
significantly negative. Columns (3) and (4) show the regression results medium shareholders to maintain consistent interest objectives. At this
for the small sample of stock price crash risk. The coefficient of CSEP is time, the encroachment motive is weaker, and the impact of CSEP on
significantly positive when CSEP2 is not included in Column (3). The co­ appropriation behavior is not obvious. The above analysis further con­
efficients of CSEP and CSEP2 are significant when CSEP2 is included in firms the rationality of the mechanism analysis in this study.
column (4), and the coefficient values are positive and negative,
respectively. The above results indicate that there is an inverted U- 6. Conclusions and recommendations
shaped relationship between CSEP and CDT, in the case of both, high
and low risk of share price collapse. Further calculation of the inflection Digital transformation is an inevitable requirement for corporations
point value reveals that it is 0.5488 when the risk of stock price collapse to augment their competitive advantages, obtain profit growth points,
is high and 0.6043 when it is low. These results confirmed the reason­ and achieve high-quality development. Equity pledges are widely used
ableness of the previous mechanism analysis. When the risk of stock as a convenient method of financing in China’s capital markets. How do
price collapse is high and that of control transfer is high in the sample controlling shareholders’ equity pledges (CSEP) affect digital corporate
corporations, the inhibitory effect of the controlling shareholder equity transformation (CDT)? What intrinsic mechanisms are involved? The
pledge on CDT occurs earlier. At this time, the inflection point shifts development of digital technology has contributed to CDT while giving
leftward. rise to digital finance as an emerging financial industry. How will digital
finance affect the relationship between the CSEP and CDT through its
5.3. Motives for appropriation role in financial support and external governance? This study answers
these questions by conducting an empirical test based on theoretical
In addition to the motive of preventing the risk of the transfer of analysis, using data from A-share listed corporations from 2011 to 2021.
control, that of appropriation, caused by the separation of the two rights, We arrived at several interesting conclusions.
is also an important reason for inhibiting CDT when the ratio of equity First, there was an inverted U-shaped impact of CSEP on CDT. In
pledges is high. A controlling shareholder’s appropriation is typical of other words, the intensity of CDT increased, and then declined, as the
encroachment (Jiang, Lee, & Yue, 2010). Therefore, this study refers to ratio of CSEP rose. The inflection point value of CSEP on CDT from
the practice of relevant scholars who use the ratio of other receivables to promoting to inhibiting was 0.5820.
total assets to measure the degree of controlling shareholders’ appro­ Second, digital finance plays a moderating role in the relationship
priation and regress it as the dependent variable (Liu & Tian, 2022). The between CSEP and CDT. The higher the development level of digital
analysis of the mechanism in this study concludes that controlling finance, the weaker the inhibitory effect of CSEP on CDT. Specifically, at
shareholders’ benefit appropriation is more obvious when the equity lower levels of digital finance development, the impact of CSEP on the
pledge ratio is high. When the pledge ratio is low, the incentive effect CDT remains inverted and U-shaped. When digital finance reaches me­
remains dominant. Combined with the inflection point value (0.5820) dium and higher levels of development, the impact of the CSEP on CDT
obtained from the previous regression results, this study divides the full shows a linear promotion effect, and the higher the level of digital
finance development, the stronger the promotion effect.
Third, the value of the inflection point of the inverted U-shaped
Table 6
impact of CSEP on CDT is smaller when the risk of share price collapse is
Appropriation motivation test.
high. This indicates that the motive to prevent the risk of control transfer
Variables Full sample CSEP≥0.5820 CSEP<0.5820
is partly responsible for the inverted U-shaped impact of CSEP on CDT. A
(1) (2) (3) further test of the appropriation motive finds that CSEP has significant
0.0008 0.0132** 0.0011 positive and non-significant effects on appropriation behavior, when the
CSEP
(0.0012) (0.0054) (0.0016) equity pledge ratios are high and low, respectively. This finding suggests
0.0374*** 0.0546*** 0.0294*** that the motive for appropriation caused by the separation of powers is
Constant
(0.0070) (0.0186) (0.0074)
also an important reason for the inverted U-shaped effect of CSEP on
Control variables Controlled Controlled Controlled
Individual effects Controlled Controlled Controlled CDT.
Time effects Controlled Controlled Controlled Accordingly, the policy recommendations made in this paper are as
Obs. 26,700 5061 21,639 follows.
Intra-group goodness of fit 0.0236 0.0408 0.0161 First, the conclusion of this paper suggests that equity pledging is still
Note: ***, **, * represent significant at 1%, 5%, 10% confidence level, respec­ a feasible financing method, considering the real demand of CDT.
tively. () are clustering robust standard errors. However, the conclusion of an inverted U-shaped relationship between

9
Y. Zhang et al. International Review of Financial Analysis 90 (2023) 102853

the ratio of CSEP and CDT suggests that the former should be limited.
Although the current policy regulates the proportion of equity pledges
by state-owned shareholders and the overall pledge ratio in the A-share
stock market, it does not impose restrictions on the proportion of equity
pledges by controlling shareholders. The inflection points calculated in
this study provide a reference for introducing future policies to limit the
proportion of CSEP.
Second, the development of digital finance can weaken the inhibi­
tory effects of CSEP on CDT to a certain extent. Therefore, we should
continue to promote the development of digital finance in the future and
give full play to the effects of financial support and the external gover­
nance of digital finance. On the one hand, we should relax the market
access threshold for financial technology and increase the R&D power of
financial technology to provide the necessary technological support for
the development of digital finance. On the other hand, we should further
strengthen the construction of Internet infrastructure, bridge the digital
divide caused by differences in the level of infrastructure construction at
the first level. This creates conditions for the balanced development of
digital finance in different regions.
Third, corporate governance mechanisms should be improved, and
corporate governance structures, optimized and adjusted through. (1)
Strengthening the role of the board of directors and supervisors. Provide
full play to the supervisory role of independent directors to ensure the
independence of the board of directors, while simultaneously ensuring
the economic independence of the supervisory board and blocking the
connection between supervisors and corporate interests. (2) Improving
the system of “three meetings and one layer”. Play the respective roles of
shareholders, directors, supervisors, and senior management, and ach­
ieve effective checks and balances to protect the rights of small and
medium shareholders. (3) Government strengthening information
disclosure. Adequate information is a prerequisite for enhancing the
effectiveness of both internal and external governance. Enhancing the
transparency of internal information and weakening the asymmetry of
internal and external information will enhance the effectiveness of su­
pervision by small and medium shareholders and utilize the external
governance role of the media and government. This can regulate the
behavior of controlling shareholders to some extent.
Given this research theme, future research can be deepened from the
following aspects: First, CDT involves two dimensions: capital input and
transformation results. Due to the poor availability of capital input data,
this study’s measurement of CDT focuses more on the latter. In the
future, based on adequate data acquisition, we can further discuss the
influence and mechanism of CSEP on the capital investment of CDT.
Second, the digital transformation methods of enterprises include self-
research, outsourcing, or both. The effects of different transformation
methods are different. What kind of transformation methods the con­
trolling shareholders prefer after equity pledge is the focus to be further
studied. Third, the funds obtained after the CSEP can be used for per­
sonal consumption, the company or other third parties. Different capital
flows directly affect the available resources of the CDT. At the same
time, it conveys to the outside world the controlling shareholder’s
confidence in the development of the corporation, thus affecting the risk
of transfer of control. However, it should be noted that the independent
variable chosen in this paper is the proportion of CSEP at the end of the
year. For corporations, this value may be the cumulative value after
more than one year and multiple pledges. Therefore, it is difficult to
accurately determine the use of funds obtained by corporations from
CSEP at a given moment in time. In the future, when the data meets the
conditions, it can be considered to specifically distinguish different
capital flows and conduct study.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influence
the work reported in this paper.
Data availability
Data will be made available on request.
Acknowledgements
This study is supported by Xiong’an New Area Research Project,
Hebei University (2023HXA004).

Appendix A
Table A1
List of keywords for CDT.

Primary dimension Keywords

Artificial intelligence
technology
Big data technology
Blockchain technology
Cloud computing
technology
Digital technology
applications
Artificial intelligence, business intelligence, image understanding, investment decision aid systems, intelligent data analysis, intelligent robotics,
machine learning, deep learning, semantic search, biometrics, face recognition, speech recognition, authentication, autonomous driving, natural
language processing.
Big data, data mining, text mining, data visualization, heterogeneous data, credit information, augmented reality, mixed reality, virtual reality.
Blockchain, digital currency, distributed computing, differential privacy technology, smart financial contracts.
Cloud computing, stream computing, graph computing, memory computing, multi-party security computing, brain-like computing, green computing,
cognitive computing, fusion architecture,100 million level concurrency, EB level storage, Internet of Things, information physical systems.
Mobile Internet, Industrial Internet, Internet medical, e-commerce, mobile payment, third-party payment, NFC payment, intelligent energy, B2B, B2C,
C2B, C2C, O2O, Internet connection, smart wear, smart agriculture, intelligent transportation, intelligent medical, intelligent customer service,
intelligent home, intelligent investment, intelligent travel, intelligent environmental protection, intelligent power grid, intelligent marketing, digital
marketing, unmanned retail, Internet finance, digital finance, Fintech, Financial technology, quantitative finance, open banking.

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