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The Effectiveness of Public Enforcement: Evidence from the Resolution of Tunneling in China

Author

Listed:
  • Lars Helge Haß

    () (Lancaster University)

  • Sofia Johan

    () (York University)

  • Maximilian André Müller

    () (WHU – Otto Beisheim School of Management)

Abstract

Abstract This paper examines the effectiveness of public enforcement by studying the effects of regulatory intervention to curb tunneling through intercorporate loans in China. Specifically, we explore whether public enforcement efforts in 2006 (blacklisting and sanctions) resulted in less tunneling, and ultimately in increased performance for tunneling firms. We show that tunneling is among the dominant factors increasing the likelihood of becoming blacklisted. We also find that firms’ tunneling mechanisms decreased significantly after the regulatory shock, and that their performance increased significantly compared to non-tunneling firms after the regulatory shock. Finally, we find a positive market reaction to the public announcement of tunneling both for firms that have been blacklisted and other tunneling firms that are not blacklisted. Collectively, these results suggest that public enforcement in the presence of a credible threat succeeds in deterring the effect on tunneling behavior in China.

Suggested Citation

  • Lars Helge Haß & Sofia Johan & Maximilian André Müller, 2016. "The Effectiveness of Public Enforcement: Evidence from the Resolution of Tunneling in China," Journal of Business Ethics, Springer, vol. 134(4), pages 649-668, April.
  • Handle: RePEc:kap:jbuset:v:134:y:2016:i:4:d:10.1007_s10551-014-2389-z
    DOI: 10.1007/s10551-014-2389-z
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    References listed on IDEAS

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    Cited by:

    1. Douglas Cumming & Wenxuan Hou & Edward Lee, 2016. "Business Ethics and Finance in Greater China: Synthesis and Future Directions in Sustainability, CSR, and Fraud," Journal of Business Ethics, Springer, vol. 138(4), pages 601-626, November.

    More about this item

    Keywords

    Corporate governance; Tunneling; Enforcement;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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