Cross-ownership and tunnelling: evidence from China

The phenomenon that firms form association through the same shareholders widely exists in the global capital market. Using the data of China’s listed firms from 2008 to 2018, we examine whether cross-ownership can restrain the tunnelling behaviour of controlling shareholder. We find that cross-ownership can significantly reduce the tunnelling behaviour of controlling shareholders. It survives a series of endogeneity tests and robustness tests. Further analysis shows that the information advantage and governance experience are the two potential mechanisms through which cross-ownership affects tunnelling. Meanwhile, cross-ownership plays the positive role in restraining tunnelling mainly by increasing shareholding ratio and appointing directors. Moreover, this effect is more pronounced in firms with lower equity concentration, less analyst coverage and worse reputation of auditors. This paper not only highlights the critical role played by cross-ownership in shaping micro-economic behaviours by providing novel evidence from emerging markets, but also has some crucial implications for capital market supervision and industry antitrust policy-making.