The Rise of US-Listed VIEs from China: Balancing State Control and Access to Foreign Capital

Abstract

We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the US. VIEs are explicitly designed to circumvent the intent of Chinese law on foreign control, and potentially exacerbate agency conflicts within the firm. We find that the use of VIEs is widespread and growing, and estimate that it is associated with valuation discounts of as much as 30% relative to Chinese non-VIE firms listed in the US. The discount varies predictably with events that change the risk of government intervention and managerial malfeasance, and is tempered by better oversight (large auditor and institutional investment) and lower regulatory risk (politically connected directors and high media visibility). To protect shareholders, VIE firms are more likely to have these characteristics as well as to curry government favor by contributing to disaster relief and hiring excess employees.

Keywords: Corporate governance, investor protection, variable interest entities, market regulation

JEL Classification: G30, G34, M41, K22