Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong

Cheung, Yan‐Leung; Rau, P. Raghavendra; Stouraitis, Aris

doi:10.2139/ssrn.1008780

Cited by 259 publications

(392 citation statements)

References 45 publications

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“…However, controlling shareholders of business groups can also take advantage of related party transactions for their own benefit. By examining a sample of connected transactions between Hong Kong listed companies and their large shareholders, Cheung et al (2006) observe significantly negative excess returns around announcement dates of connected transactions. Sometimes minority shareholders can benefit from related party transactions due to propping up, yet such propping is temporary ( Jian and Wong, 2010).…”

Section: Related Party Transactionmentioning

confidence: 99%

The value of group affiliation: evidence from the 2008 financial crisis

Huang

2013

International Journal of Managerial Finance

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Access to this document was granted through an Emerald subscription provided by emerald-srm:198285 [] For AuthorsIf you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to observe listed firms in China during the 2008 financial crisis and investigates how group affiliation affects firm value when the economy turns down. The paper focusses the study on answering the following questions: during the crisis, do affiliated firms have higher or lower stock returns than independent firms? Does corporate governance relate to the value of group firms? How does group affiliation influence firm value? Does performance of affiliated entrepreneurial firms differ from affiliated state-owned enterprises (SOEs)? Design/methodology/approach -The paper uses non-parametric tests and regression analysis on a sample of 1,469 Chinese listed companies to investigate the research questions. Findings -Affiliated firms have lower stock returns than independent firms by 1.91 percent during September to December of 2008. This poor performance is even worse for firms seriously shocked by the crisis. Good corporate governance can mitigate the negative effects of group affiliation on firm value. The lower valuation of affiliated firms lies in the fact that controlling shareholders undertake more related party transactions at the expense of minority shareholders. Finally, although business groups can provide internal financing for entrepreneurial firms in China, affiliated entrepreneurial firms experience a larger value decrease than affiliated SOEs due to the conflict interest between controlling and minority shareholders. Originality/value -This research provides unique evidence about the performance of groupaffiliated firms during the 2008 financial crisis and documents the mechanisms through which group affiliation influences firm value.

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Section: Related Party Transactionmentioning

confidence: 99%

The value of group affiliation: evidence from the 2008 financial crisis

Huang

2013

International Journal of Managerial Finance

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“…Cheung, Rau and Stouraitis [25] suggest that the weak legal and market institutions in China will increase the frequency of propping and tunneling practices of the firms, also Fan and Wong [26] state that controlling shareholders unlikely provide high quality accounting information because of strong expropriation opportunism. So it is reasonable to believe that the expropriation of minority shareholders and earnings management can be stronger in China.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Cheung, Rau and Stouraitis [25] also conclude that controlling shareholders expropriate minority shareholders through related party transactions between Hong Kong listed companies and investors cannot predict expropriation and revalue firms only when expropriation does occur. Some other studies also find implicit evidence of expropriation in Chinese listed companies.…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, this may not hold for countries with weak investor protection. The potential costs of such manipulation are much lower in these countries, which is the main reason for the high frequency of propping and tunneling practices of Chinese firms (e.g., Fan and Wong [26] ; Friedman, Johnson and Mitton [14] ; Cheung, Rau and Stouraitis [25] ). As a result, the degree of propping or tunneling through earnings management will not necessarily be reduced when the deal value decreases.…”

Section: Modeling the Association Between Targets' Abnormal Accruals mentioning

confidence: 99%

“…Is the extent of earnings management affected by other factors such as the deal value of M&As, the ownership structure of target firms? 2010 International Conference on Management Science & Engineering (17 th ) November [24][25][26]2010 Melbourne, Australia…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Controlling shareholders' propping or tunneling: A choice of earnings management — Evidence from target firms in China

Ya-juan

2010

2010 International Conference on Management Science &Amp; Engineering 17th Annual Conference Proceedings

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This paper documents a unique form of controlling shareholders' propping and tunneling through earnings management prior to China's equity transactions, and we find the significant evidence that the controlling shareholders of targets attempt to employ income-increasing accruals management prior to the mergers that acquirers are not the controlling shareholders of targets so as to increase their revenue from equity transactions and income-decreasing accruals management prior to the mergers that acquirers are actually the controlling shareholders of targets in order to decrease their cost of equity purchases. The results suggest that the accruals management is not general for targets, which is associated with incentives of controlling shareholders related to the accruals. We investigate the shareholder wealth effects of equity transactions and their association with abnormal accruals and find the evidence that the outside investors cannot detect controlling shareholders' propping, but can at least partially see through the tunneling of controlling shareholders. Our results also indicate that the markets are hardly to fully recognize the difference of earnings management between controlling shareholders' propping and tunneling and outside investors cannot effectively predict and penalize the expropriation of minority shareholders only when the expropriation does occur.

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Ownership structure, economic fluctuation, and capital structure: Evidence from China

Xi¹,

Manry

Rosa

2018

Int. J Fin Econ

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We investigate the influence of controlling shareholders, including governmental ownership, on the debt levels of Chinese firms during varying economic conditions. Consistent with previous research, we find that listed firms in China have significantly more short‐term debt than long‐term debt. We also find that as the percentage ownership of the largest shareholder increases, less debt (as a percentage of total assets) is generally preferred. During economic slowdowns, firms tend to reduce their short‐term debt levels, although long‐term debt appears to increase. Further tests reveal that entrepreneur‐controlled firms reduce long‐term debt during economic slowdowns, suggesting that they take into consideration the implications of changes in macroeconomic conditions for earnings and liquidity when making debt financing decisions. However, we also find that State‐controlled firms in China tend to increase short‐term borrowing during declines in macroeconomic conditions, consistent with the implications of “tunneling and propping.”

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Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong

Cited by 259 publications

References 45 publications

The value of group affiliation: evidence from the 2008 financial crisis

The value of group affiliation: evidence from the 2008 financial crisis

Controlling shareholders' propping or tunneling: A choice of earnings management — Evidence from target firms in China

Ownership structure, economic fluctuation, and capital structure: Evidence from China

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Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong

Cited by 259 publications

References 45 publications

The value of group affiliation: evidence from the 2008 financial crisis

The value of group affiliation: evidence from the 2008 financial crisis

Controlling shareholders' propping or tunneling: A choice of earnings management &#x2014; Evidence from target firms in China

Ownership structure, economic fluctuation, and capital structure: Evidence from China

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Controlling shareholders' propping or tunneling: A choice of earnings management — Evidence from target firms in China