Public Governance and Tunneling: Evidence from a Quasi-Experiment in China

Abstract

Purpose
This study aims to take advantage of the unprecedented anti-corruption campaign launched in China in December 2012 and examine the effect of improved public governance on tunneling.

Design/methodology/approach
This study uses a sample of Shanghai and Shenzhen Stock Exchange listed companies from 2010 to 2014 and conduct regression analyses to investigate the effect of improved public governance attributed to the anti-corruption campaign on tunneling.

Findings
This study finds that the level of tunneling decreased significantly after the anti-corruption campaign, suggesting that increased public governance effectively curbs tunneling. Cross-sectional results show that this mitigating effect is more pronounced for non-SOE firms, especially non-SOE firms with political connections, firms audited by non-Big 8 auditors, firms with a large divergence between control rights and cash flow rights and firms located in areas with lower marketization.

Practical implications
This study highlights the importance of anti-corruption initiatives in improving public governance and in turn reducing tunneling. This study provides important implications for many other emerging economies to improve public governance.

Originality/value
This study contributes to the literature on the role of public governance in constraining corporate agency problems and advances the understanding of the economic consequences of China's anti-corruption campaign in the context of tunneling.

Keywords: Anti-corruption, Public governance, Tunneling

JEL Classification: D73, G34