Expropriation of Minority Shareholders in Politically Connected Firms

Abstract

The conflict of interests between controlling and minority shareholders is an important issue in firms with concentrated ownership. We document that the controlling shareholders’ expropriation behavior through tunneling or self-dealing is much severer in politically connected firms. The results are not due to firms with high tendency of expropriation establishing connection for protection, but because of a less concern of capital market punishment. We show that expropriation is severer only in firms whose political connection secures bank loan access. These findings are consistent with the view that the firms’ financing condition is an important dimension that influences corporate governance.

Keywords: ownership concentration, expropriation, political connection, external financing

JEL Classification: G32, G34