Controlling Shareholder‐Manager Collusion and Tunneling: Evidence from China

20 Pages Posted: 30 Oct 2014

See all articles by Min Zhang

Min Zhang

Renmin University of China

Shenghao Gao

Renmin University of China - School of Business

Jenny Xinjiao Guan

Monash University

Fuxiu Jiang

Renmin University of China - School of Business

Date Written: November 2014

Abstract

Manuscript Type. Empirical.

Research Question/Issue. This study examines whether and how controlling shareholders collude with managers with respect to tunneling.

Research Findings/Insights. Using data from Chinese listed companies, we find evidence consistent with the collusion hypothesis. Specifically, we find that the separation of control and cash flow rights is negatively associated with managerial pay‐performance and turnover‐performance sensitivity. These results suggest that controlling shareholders with excess control rights collude with managers by weakening performance‐based incentives. Further evidence suggests that the negative relation between excess control rights and performance‐based incentives is more pronounced in less profitable and less promising firms. We also find preliminary evidence for rent‐sharing behavior between controlling shareholders and managers.

Theoretic/Academic Implications. We incorporate the influence of managers into the agency framework between controlling and minority shareholders and suggest that controlling shareholders and managers expropriate the minority shareholders. We also propose that excess control rights undermine normal, effective, performance‐based incentives and induce rent‐sharing behavior between controlling shareholders and managers.

Practitioner/Policy Implications. We advise firms' stakeholders, especially minority shareholders, to detect tunneling by observing executive incentives. We suggest that policy makers pay particular attention to the collusion between tunneling participants rather than merely prohibiting certain tunneling tactics. We also recommend that regulators strengthen corporate governance norms and improve the corporate governance environment.

Keywords: Corporate Governance, Collusion, Performance‐Based Incentives, Separation of Control and Cash Flow Rights, Tunneling

Suggested Citation

Zhang, Min and Gao, Shenghao and Guan, Jenny Xinjiao and Jiang, Fuxiu, Controlling Shareholder‐Manager Collusion and Tunneling: Evidence from China (November 2014). Corporate Governance: An International Review, Vol. 22, Issue 6, pp. 440-459, 2014. Available at SSRN: https://ssrn.com/abstract=2516571 or http://dx.doi.org/10.1111/corg.12081

Min Zhang

Renmin University of China ( email )

School of Business,Renmin University of China
Beijing, Beijing 100872
China

Shenghao Gao

Renmin University of China - School of Business

Beijing
China

Jenny Xinjiao Guan

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Fuxiu Jiang

Renmin University of China - School of Business ( email )

Beijing
China

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
562
PlumX Metrics