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Tunneling and Value Relevance of Financial Reports: Evidence from Hong Kong

Author

Listed:
  • Y. Xie

    (Department of Accounting, Hong Kong Shue Yan University 10 Wai Tsui Crescent, Braemar Hill Road, North Point, HONG KONG)

  • H. Lee (Correspondence author)

    (Department of Accounting, Hong Kong Shue Yan University 10 Wai Tsui Crescent, Braemar Hill Road, North Point, HONG KONG)

Abstract

Using a sample of Hong Kong listed firms that announced related party transactions, this paper examines the informativeness of financial reports prior to the announcements of related party transactions. We find that the value relevance of financial reports is higher for firms undertaking asset or equity tunneling transactions than for firms undertaking other types of related party transactions in the period prior to the announcement of transactions. Given firms with forthcoming tunneling transactions, financial reports are more value relevant for firms with more conservative accounting than for firms with less conservative accounting. Further, the association between conservatism and entrenchment effect is stronger for firms with forthcoming tunneling transactions. Collectively, the evidence suggests that firms adopt conservative accounting to increase the informativeness of financial reports prior to the tunneling transactions, which assists controlling shareholders in expropriating wealth from the minority shareholders from the tunneling transactions.

Suggested Citation

  • Y. Xie & H. Lee (Correspondence author), 2018. "Tunneling and Value Relevance of Financial Reports: Evidence from Hong Kong," Review of Economics & Finance, Better Advances Press, Canada, vol. 11, pages 67-82, February.
    • Handle: RePEc:bap:journl:180106
    Note: The authors are thankful to anonymous reviewers and the Editor (Dr. H. Carlson) for their valuable comments.
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial statement informativeness; Conservatism; Related party transaction; Connected transaction;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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