Expropriation Through Loan Guarantees to Related Parties: Evidence from China

Abstract:     
We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. Firms with State Non-Corporate controlling block holders are less likely to issue related guarantees than are firms with State Corporate, Private or Foreign controlling block holders, and firms with higher percentage ownership by Private non-controlling block holders are less likely to issue related guarantees. In addition, we use this sample to provide new evidence on the relation between tunnelling and proxies for firm value. We find that Tobin's Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.

Number of Pages in PDF File: 34

Keywords: block holder, China, expropriation, minority shareholder, Tobin's Q, tunneling

JEL Classification: G32, G34, G38

working papers series