Tunneling and Propping Up: An Analysis of Related Party Transactions by Chinese Listed Companies

Pacific-Basin Finance Journal, 17 (3), 372-393, 2009.

52 Pages Posted: 20 Oct 2008 Last revised: 14 Sep 2012

Stephen Yan-Leung Cheung

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Lihua Jing

affiliation not provided to SSRN

Tong Lu

affiliation not provided to SSRN

P. Raghavendra Rau

University of Cambridge

Aris Stouraitis

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences

Date Written: September 20, 2009

Abstract

We examine a sample of related party transactions between Chinese publicly listed firms and their controlling shareholders during 2001-2002. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. On balance, there is more tunneling than propping. Both types of firms have larger state ownership compared to the rest of the Chinese market but firms that are propped up are larger and have larger state ownership than firms subject to tunneling. Propped up firms are more likely to have foreign shareholders and to be cross-listed abroad compared to firms that are subject to tunneling. Propped up firms also tend to have worse operating performance in the fiscal year preceding the announcement of the related party transaction. Finally, we find that related party transactions representing tunneling are accompanied by significantly less information disclosure compared to related party transactions representing propping.

Keywords: International corporate governance, China, Related party transactions, Tunneling, Propping

JEL Classification: G15, G34, K33

Suggested Citation

Cheung, Stephen Yan-Leung and Jing, Lihua and Lu, Tong and Rau, P. Raghavendra and Stouraitis, Aris, Tunneling and Propping Up: An Analysis of Related Party Transactions by Chinese Listed Companies (September 20, 2009). Pacific-Basin Finance Journal, 17 (3), 372-393, 2009.. Available at SSRN: https://ssrn.com/abstract=1286887

Stephen Yan-Leung Cheung

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
+852 2788 7960 (Phone)
+852 2788 8806 (Fax)

Lihua Jing

affiliation not provided to SSRN

Tong Lu

affiliation not provided to SSRN ( email )

P. Raghavendra Rau (Contact Author)

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

Aristotelis Stouraitis

Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences ( email )

Hong Kong

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