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. In addition, we use this sample to provide new evidence on the relation between tunneling and proxies for firm value and financial performance. 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.

Keywords: Block holder, China, connected party transaction, corporate governance, expropriation, related party transaction, Tobin's Q, tunneling

JEL Classification: G32, G34, G38, G15