Controlling Shareholder, Expropriations and Firm's Leverage Decision: Evidence from Chinese Non-Tradable Share Reform

31 Pages Posted: 9 Sep 2014

See all articles by Qigui Liu

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: September 7, 2014

Abstract

This paper examines the effect of excess control rights on the leverage decisions made by Chinese non-SOEs before and after the Non-tradable share reform (NTS reform). We find that firms with excess control rights have more excess leverage and their controlling shareholders use the resources for tunneling rather than investing in positive NPV projects. We also find that excess leverage in firms with excess control rights decreases and the market reaction to announcements of related party transactions are more positive after NTS reform. This confirms that tunneling by the controlling shareholders actually reduced. We argue that in emerging markets where legal protection for creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel through inter-corporate loans and related party transactions. Furthermore the privatization of these economies can reduce the controlling shareholders’ tunneling activities and associated excess leverage which destroys firm value.

Keywords: Leverage decision; Excess control rights; Tunneling; Chinese non-tradable share reform

JEL Classification: G32, G34

Suggested Citation

Liu, Qigui and Tian, Gary Gang, Controlling Shareholder, Expropriations and Firm's Leverage Decision: Evidence from Chinese Non-Tradable Share Reform (September 7, 2014). Journal of Corporate Finance, Vol. 18, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=2492887 or http://dx.doi.org/10.2139/ssrn.2492887

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University ( email )

Hangzhou, Zhejiang Province 310058
China

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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