Why Member Firms Hold More Cash When They Have Access to the Business Group’s Finance Company? Empirical Evidence of Tunneling from China

61 Pages Posted: 27 Mar 2019

See all articles by Hao Peng

Hao Peng

University of Glasgow - Adam Smith Business School

Hong Liu

Loughborough University - School of Business and Economics

Yuxiang Jiang

GalaxyAsset management; East China University of Science and Technology (ECUST)

Date Written: March 5, 2019

Abstract

In China, firms within a business group may be able to access funds provided by a parent-owned finance company within the business group. We provide direct evidence of ‘tunneling’: where the parent of the business group requires member firms to increase their cash holdings through deposits in the group’s finance company and invest the collected deposits in the interbank market or other financial institutions, instead of lending to business group members. The parent of the business group reaps most, if not all, the profits from the finance company, at the expense of member firms’ increased holding in cash. We use the Shenzhen 2007 Anti-tunneling Guidance as the exogenous shock to identify the main results. Our results cannot be explained by the alternative hypotheses that member firms hold more cash holdings as a result of reduced bank monitoring or the parent’s incentive to reallocate capital more efficiently.

Keywords: Finance company, Tunneling, Business group, cash holding, shadow banking

JEL Classification: G23, G39

Suggested Citation

Peng, Hao and Liu, Hong and Jiang, Yuxiang, Why Member Firms Hold More Cash When They Have Access to the Business Group’s Finance Company? Empirical Evidence of Tunneling from China (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3347027 or http://dx.doi.org/10.2139/ssrn.3347027

Hao Peng

University of Glasgow - Adam Smith Business School

Glasgow, Scotland
United Kingdom

Hong Liu (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Yuxiang Jiang

GalaxyAsset management ( email )

shanghai
century avenue
shanghai, shanghai
China

East China University of Science and Technology (ECUST) ( email )

Shanghai
China

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