Tunneling in China: The Surprisingly Pervasive Use of Corporate Loans to Extract Funds from Chinese Listed Companies

41 Pages Posted: 5 Dec 2005

See all articles by Guohua Jiang

Guohua Jiang

Peking University - Guanghua School of Management

Charles M.C. Lee

Stanford University - Graduate School of Business

Heng Yue

Singapore Management University - School of Accountancy

Date Written: November 29, 2005

Abstract

This study documents the widespread use of corporate loans by controlling shareholders to extract funds from Chinese listed companies. Typically reported as Other Receivables (OREC), these loans represent a substantial portion of the reported assets of Chinese firms. We show that companies with large OREC balances experience worse future operating performance and are much more likely to become candidates for delisting. High-OREC firms have generally lower market valuations, but still earn negative risk-adjusted returns in the future. Consistent with prior studies, this form of tunneling is most severe when the block shareholder's controlling right (C) is significantly larger than her ownership right (O). Auditors appear to play a monitoring role, but absent effective regulatory enforcement action, unclean audit opinions alone seem insufficient to deter tunneling behavior.

Keywords: Tunneling, Law and Finance, China

JEL Classification: G15, G32, K22, M49

Suggested Citation

Jiang, Guohua and Lee, Charles M.C. and Yue, Heng, Tunneling in China: The Surprisingly Pervasive Use of Corporate Loans to Extract Funds from Chinese Listed Companies (November 29, 2005). Johnson School Research Paper Series No. 31-06. Available at SSRN: https://ssrn.com/abstract=861445 or http://dx.doi.org/10.2139/ssrn.861445

Guohua Jiang (Contact Author)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China
+8610 62757930 (Phone)
+8610 62751470 (Fax)

Charles M.C. Lee

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Heng Yue

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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