Expropriation Through Loan Guarantees to Related Parties: Evidence from China

34 Pages Posted: 23 Apr 2007

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Henk Berkman

University of Auckland - Business School

Jiang Lawrence Fu

Standard Charter Bank

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2007

Abstract

We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. Firms with State Non-Corporate controlling block holders are less likely to issue related guarantees than are firms with State Corporate, Private or Foreign controlling block holders, and firms with higher percentage ownership by Private non-controlling block holders are less likely to issue related guarantees. In addition, we use this sample to provide new evidence on the relation between tunnelling and proxies for firm value. We find that Tobin's Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.

Keywords: block holder, China, expropriation, minority shareholder, Tobin's Q, tunneling

JEL Classification: G32, G34, G38

Suggested Citation

Cole, Rebel A. and Berkman, Henk and Fu, Jiang Lawrence, Expropriation Through Loan Guarantees to Related Parties: Evidence from China (April 18, 2007). Available at SSRN: https://ssrn.com/abstract=981285 or http://dx.doi.org/10.2139/ssrn.981285

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Henk Berkman

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Jiang Lawrence Fu

Standard Charter Bank ( email )

Hong Kong
China

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