Tunneling And Propping From Controlling Shareholders

Since the rise of Berle-Means theorem, the viewpoint of dispersed ownership structure has been prevalent for near 50 years. During this period, the study of corporate governance focuses on agency cost caused by conflict between shareholder and manager under the hypothesis of dispersed ownership structure. However, since 1980s, especially after the excellent study of La Porta et al. (1999), the viewpoint of concentrated ownership structure rises gradually and brings forward austere challenge to the viewpoint of dispersed ownership structure. As a result, the focus of study of corporate governance changes from former agency cost to another kind of agency cost, which is caused by the conflict between controlling shareholder and minority shareholders under the hypothesis of concentrated ownership structure. Under the realistic background that China is a typical country where the ownership structure is highly concentrated, studying the governance of large shareholder and problems caused by large shareholder seems significative.Recently, two kinds of behaviors carried out by controlling shareholder, which are called "tunneling" and "propping", become one of the most interesting topics in corporate governance study. Existing papers mostly focus on behavior of tunneling and pay less attention to propping. Moreover, influencing factors are less studied, most studies analyze ways, scales and consequences of tunneling and propping in stead. Especially, few studies refer to the relationship between tunneling and propping, and empirical evidences on this relationship can hardly be founded.Relevant papers mostly use state-owned listed companies as their samples to analyze tunneling and propping carried out by government as controlling shareholder. This paper use private listed companies in Chinese stock market from 2002 to 2004 as samples, containing 406 firm-year panel data. We analyze the influencing factors of tunneling and propping in private listed companies and the relationship between them. Our empirical results show that:Some corporate governance mechanisms can significantly restrict controlling shareholder's tunneling and propping. For example, supervisal from outside large shareholders, better law environment and incentive effect brought by more cash flow rights can reduce the intensity of tunneling, better law environment can also reduce the intensity of propping. However, other corporate governance mechanisms, such as independence of board of directors, seem noneffective to restrict controlling shareholder's tunneling and propping. Moreover, family controlling shareholders tend to tunnel and prop more than non-family controlling shareholders.For the aspect of firm characteristics, large firms tend to have more tunneling and propping. There are more tunneling but less propping in companies that having been private firms for a longer time.Controlling shareholders prop up more when the listed firms want to maintain listing status or qualify for rights issues. But propping under this incentive is opportunistic, the aim of controlling shareholder's opportunistic propping is to expropriate more in the future, which leads to more tunneling in these firms. Opportunistic propping that for the incentive of maintaining listing status or qualifying for rights issues does not increase firm value. On the contrary, substantial propping that without the incentive of maintaining listing status or qualifying for rights issues can significantly increase firm value.