Expropriation Through Loan Guarantees to Related Parties: Evidence from China

35 Pages Posted: 24 Nov 2008 Last revised: 10 Apr 2010

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Rebel A. Cole

Florida Atlantic University

Jiang Lawrence Fu

Standard Charter Bank

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2007

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

Suggested Citation

Berkman, Henk and Cole, Rebel A. and Fu, Jiang Lawrence, Expropriation Through Loan Guarantees to Related Parties: Evidence from China (September 3, 2007). Journal of Banking and Finance, Vol. 33, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1305217

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Jiang Lawrence Fu

Standard Charter Bank ( email )

Hong Kong
China

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