Family Controlling Shareholder's Tunneling In Pyramidal Ownership

This paper identifies what type of related party transactions is lead to tunneling and investigates the corporate governance effects of tunneling using a sample of 501 Chinese companies under the pyramidal ownership structure and the related party transactions between these companies and its controlling shareholders during 2002-2004. By testing the mediating variable and mediating effect, we find that, four types of related party transactions are used to tunnel by family controlling shareholders including goods trading, labor services, fund relations and assurance and mortgage. The tunneling is more severe when the degree of divergence between the cash-flow right and voting right is greater and when controlling shareholder assign a listed firm's board chairman or general manager. In the meantime, other large shareholders have significantly negatively related to tunneling.