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Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities

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  • Jiang, Guohua
  • Rao, Pingui
  • Yue, Heng

Abstract

In this paper, we investigate the problem of controlling shareholder Non-Operational Fund Occupancy (NOFO) in China, where controlling shareholders directly take funds away from listed firms without matching business transactions. The NOFO problem was an evident and widely used tunneling activity in China and was identified by the securities market regulators. Unlike previous literature that used indirect measures of tunneling, we directly collect the actual amounts of NOFO from mandated disclosures and utilize this direct measure of tunneling in a series of empirical tests. First, we examine and find that various mechanisms such as ownership structure, corporate governance and institutional environments could restrain tunneling activities. Second, we find significantly positive market reactions to regulations that aimed to solve the NOFO problem. Third, we find evidence that the operating performance and valuation of firms with a NOFO problem improved after the regulations went into effect. Our study sheds light on the severe issue of minority shareholder expropriation and the effectiveness of regulators' policy to remedy the tunneling problem.

Suggested Citation

  • Jiang, Guohua & Rao, Pingui & Yue, Heng, 2015. "Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 295-311.
  • Handle: RePEc:eee:corfin:v:32:y:2015:i:c:p:295-311
    DOI: 10.1016/j.jcorpfin.2014.10.011
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    Cited by:

    1. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    2. repec:eee:finana:v:57:y:2018:i:c:p:157-166 is not listed on IDEAS
    3. Cheng, Minying & Lin, Bingxuan & Wei, Minghai, 2015. "Executive compensation in family firms: The effect of multiple family members," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 238-257.
    4. Huang, Wei & Zhu, Tao, 2015. "Foreign institutional investors and corporate governance in emerging markets: Evidence of a split-share structure reform in China," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 312-326.
    5. repec:wsi:jicepx:v:08:y:2017:i:03:n:s1793993317500156 is not listed on IDEAS
    6. Jiang, Fuxiu & Ma, Yunbiao & Shi, Beibei, 2017. "Stock liquidity and dividend payouts," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 295-314.

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