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Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform

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  • Liu, Qigui
  • Tian, Gary
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    Abstract

    This paper examines the effect of excess control rights on the leverage decisions made by Chinese non-SOEs before and after the Non-tradable share reform (NTS reform). We find that firms with excess control rights have more excess leverage and their controlling shareholders use the resources for tunneling rather than investing in positive NPV projects. We also find that excess leverage in firms with excess control rights decreases and the market reaction to announcements of related party transactions are more positive after NTS reform. This confirms that tunneling by the controlling shareholders actually reduced. We argue that in emerging markets where legal protection for creditors and shareholders is weak, controlling shareholders borrow excess debt to tunnel through inter-corporate loans and related party transactions. Furthermore the privatization of these economies can reduce the controlling shareholders' tunneling activities and associated excess leverage which destroys firm value.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 18 (2012)
    Issue (Month): 4 ()
    Pages: 782-803

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    Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:782-803

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Leverage decision; Excess control rights; Tunneling; Chinese non-tradable share reform;

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    Cited by:
    1. Kuo, Jing-Ming & Ning, Lutao & Song, Xiaoqi, 2014. "The Real and Accrual-based Earnings Management Behaviors: Evidence from the Split Share Structure Reform in China," The International Journal of Accounting, Elsevier, vol. 49(1), pages 101-136.
    2. Su, Kun, 2014. "The inner structure of pyramid and capital structure: Evidence from China," Economics Discussion Papers 2014-5, Kiel Institute for the World Economy.
    3. Dutt, Tanuj & Humphery-Jenner, Mark, 2013. "Stock return volatility, operating performance and stock returns: International evidence on drivers of the ‘low volatility’ anomaly," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 999-1017.

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