Tunneling and propping up: An analysis of related party transactions by Chinese listed companies

• Published in: Pacific-Basin finance journal Vol. 17; no. 3; pp. 372 - 393
• Main Authors: Cheung, Yan-Leung, Jing, Lihua, Lu, Tong, Rau, P. Raghavendra, Stouraitis, Aris
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2009; Elsevier
• Series: Pacific-Basin Finance Journal
• Subjects: China; International corporate governance; International corporate governance China Related party transactions Tunneling Propping; Propping; Related party transactions; Tunneling; China; Related party transactions; Tunneling; Propping; G34; International corporate governance; G15; K33
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2008.10.001

We examine a sample of related party transactions between Chinese publicly listed firms and their controlling shareholders during 2001–2002. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. On balance, there seems to be more tunneling than propping up. Both types of firms have larger state ownership compared to the rest of the Chinese market but firms that are propped up are larger and have larger state ownership than firms subject to tunneling. Propped up firms are more likely to have foreign shareholders and to be cross-listed abroad compared to firms that are subject to tunneling. Propped up firms also tend to have worse operating performance in the fiscal year preceding the announcement of the related party transaction. Finally, we find that related party transactions representing tunneling are accompanied by significantly less information disclosure compared to related party transactions representing propping.