Tunneling in China: The Remarkable Case of Inter-Corporate Loans

53 Pages Posted: 2 Jul 2008

See all articles by Guohua Jiang

Guohua Jiang

Peking University - Guanghua School of Management

Charles M.C. Lee

Stanford University - Graduate School of Business

Heng Yue

Singapore Management University - School of Accountancy

Date Written: May 30, 2008

Abstract

Recent events in China provide a historical opportunity to study the expropriation of minority shareholders. In this paper, we document the use of inter-corporate loans by controlling shareholders to extract funds from Chinese listed firms. Using accounting information from public sources, we show how tens of billions of RMB were siphoned from hundreds of companies during the 1996 to 2006 period. Specifically, we show the nature and extent of these abuses, evaluate their economic consequences, explore their cross-sectional determinants, and report on the extensive efforts by auditors and regulators that eventually contained this practice. Collectively, our findings shed light on the nature and severity of the tunneling problem in China, and the on-going challenges associated with regulatory reform in the country.

Keywords: Tunneling, minority shareholder rights, investor protection, regulatory reform, corporate governance, emerging markets, Chinese stock market

JEL Classification: G15, G18, N25, P21, P31, P34

Suggested Citation

Jiang, Guohua and Lee, Charles M.C. and Yue, Heng, Tunneling in China: The Remarkable Case of Inter-Corporate Loans (May 30, 2008). Available at SSRN: https://ssrn.com/abstract=1154314 or http://dx.doi.org/10.2139/ssrn.1154314

Guohua Jiang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China
+8610 62757930 (Phone)
+8610 62751470 (Fax)

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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