Multiple Large Shareholders, Excess Leverage and Tunneling: Evidence from an Emerging Market

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: Past empirical efforts in corporate governance have examined the effects of large shareholders with excess control rights on tunneling activities. However, no study has systematically investigated the effects of multiple large shareholders on excess leverage policies and tunneling in an emerging country environment where minority rights protection is weak. In this study, we examine the role of multiple large shareholders and the effects of control contestability of multiple large shareholders on firm excess leverage decision and tunneling by controlling shareholders. Research Findings/Insights: Using a sample of 2,341 Chinese firms for the years 2001 to 2013, we document that the contestability of multiple non-controlling large shareholders relative to controlling shareholders reduces the adoption of excess leverage policies, tunneling and enhances capital investment. Another intriguing finding is that the government, as a controlling shareholder, exerts significant influence and reduces the monitoring effectiveness of multiple larger shareholders. Theoretical/Academic Implications: By addressing the role of multiple large shareholders on excess leverage decisions, this study makes an important contribution to the corporate governance literature. We extend the recent developments in agency theory regarding the role of multiple large shareholders in constraining expropriation of controlling shareholders with excess control rights and their effect on firm leverage decisions. Our results support the theoretical models which indicate that the presence of multiple large shareholders is an important and efficient internal governance mechanism that mitigates a firm's agency costs, particularly, in an emerging market environment where corporate governance is weak and inadequate to curb the tunneling problem.

Non‐controlling Large Shareholders and Firm Performance in China

“…Following Jiang et al . () and Boateng and Huang (), we employ the inter‐corporate loans in the other receivables (which are traceable through public sources and do not require a “fair value” test) to measures tunneling.…”

“…In other words, these results show that NCLSs exert a positive and significant influence over tunneling, which means they deteriorate tunneling to secure their private benefits rather than create value (Shleifer and Vishny, ; Bhojraj and Sengupta, ). These results may be explained by the institutional environment in emerging countries where legal protections and other corporate governance mechanisms appear weak, which results in more prevalent tunneling (Jiang et al ., ; Boateng and Huang, ).…”

“…Furthermore, we extend the recent literature to examine the effects of NCLSs on tunneling and investment efficiency, which advances the literature of Jiang et al . () and Boateng and Huang () who state their views on tunneling and excess leverage. Additionally, we further explore whether NCLSs play different roles under different circumstances in order to provide comprehensive evidence of the corporate governance roles of NCLSs.…”

Corporate governance challenges in emerging economies

“…One strand of literature tends to suggest that related-party transactions may lead to economic efficiency due to vertical integration and missing capital markets, particularly within business groups that may provide coinsurance against difficulties or distress faced by member firms (Gordon, Henry, & Palia, 2004;Jia, Shi, & Wang, 2013;McCahery & Vermeulen, 2005). The contrasting view is that related-party transactions with group companies could be a way of tunneling resources from companies with low ownership rights to high ownership rights, while related-party transactions with controlling shareholders could be a way of serving the interests of majority inside shareholders at the expense of minority outside shareholders (Aslan & Kumar, 2014;Bertrand, Mehta, & Mulainathan, 2002;Boateng & Huang, 2017;Healy & Wahlen, 1999;Kang, Lee, Lee, & Park, 2014). Empirical research in this area ought to distinguish between the different types and forms of related-party transactions, detect expropriating behavior, and suggest ways of mitigating them.…”

Shareholder voting in China: The role of large shareholders and institutional investors

“…Several studies have examined the roles of institutional investors in China, but evidence is mixed. Some research has supported the monitoring roles of institutional investors (e.g., Boateng & Huang, 2017;Yuan, Xiao, & Zou, 2008), whereas more recent evidence suggests that institutional investors collude with managers (e.g., Firth, Lin, & Zou, 2010;Pan , Dai, & Wei, 2011). Shareholder voting is one of the few observable shareholder monitoring activities (Brickley, Lease, & Smith, 1988).…”