Study On The Management Characteristic And The Tunneling Preference Of The Controlling Shareholder

The Chinese security market has made rapid progress in the size in the past decade. Neither the numbers of the listed company nor the quantity of the financing in the early 1990s can compare with the current ones. With the development of the security market, the problems of the internal governance of listed companies in China emerged, especially the problem of the expropriation by controlling shareholder. Thus how to prevent the expropriation and protect the interests of minority shareholders becomes the key problem of corporate governance of listed companies in China.According to latest studies, concentrated corporate ownership is predominant in most countries. Although concentrated corporate ownership increases the incentive and ability for controlling shareholder to monitor the manager and deal with the agency problem between the manager and shareholder induced by dispersed corporate ownership satisfactorily, the interest of controlling shareholder is not in accordance with minority shareholders, so the expropriation to minority shareholders by controlling shareholder becomes the major agency problem.For his own benefit, controlling shareholder might transfer the assets and profit from the firm in any way possible, which expropriate the interests of other shareholders. For an example, the controlling shareholder can expropriate the capital of the listed companies directly; or sale the assets of listed company at a low price; Also they can transfer the assets from the firm through loan guarantees for the listed company; get more benefits through issuing a large proportion of cash dividends; even outright theft or fraud and so on.Previous literature has made extensive and detailed researches about the tunneling behavior by controlling shareholder and its impact on corporation. The tunneling problems were concerned by lots of scholars. Most of the academic literature has attempted to emphasize the tunneling methods, tunneling causes and tunneling effect, but seldom concerned the relation between the management characteristic and tunneling preference.In our paper, based on previous studies we analyzed the tunneling problems comprehensively; we classified the tunneling behavior into 3 kinds, such as capital expropriation, connected transactions and cash dividend. It reflected the tunneling methods adopted by controlling shareholders more comprehensively.We examine a sample of Chinese list companies from the year 2001 to 2005 and eliminate the company which is PT or drop out, the controlling shareholder changed, unrealizable characteristic and fiancécompany. At last, we obtain a sample of 2192 companies with management and 1002 companies with non-management controlling shareholder. We verify the relationship between different characteristic and tunneling preference using multi linear regression model. We find that shareholders with management entity prefer the tunneling methods of capital expropriation and connected transactions; shareholders with non-management entity prefer the tunneling method of cash dividend.We suggest that regulatory department should perfect the relevant laws and regulations actively and protect the interests of minority shareholders, prevent the controlling shareholder from transferring corporate assets and tunneling, increase the information disclosure of great related party transactions, perfect the laws of loan guarantees to other companies, implement the authorized procedure of loan guarantees to other companies strictly, prevent inside trading from expropriating the interests of minority shareholders, strengthen the monitoring role of bank and financial institutions. The corporations should optimize the internal governance structure, exert the role of shareholder meeting and board of directors and make a restriction on the assignment of directors and top management by the controlling shareholder. The board of supervisors of the company should fully exercise their functions which are supervision to board of directors and management. The corporations should also strengthen monitor and control to the managers, separate chairman of board of directors and CEO, perfect the independent director's system further and exercise independent director's role fully.The main contribution of our paper is that, based on previous studies about expropriation by the controlling shareholder we begin our analysis from the financial market circumstance and corporate governance circumstance under which the listed companies in China actually operate. Then we classify and analyze the tunneling methods of listed companies in China comprehensively, and we make a deeper and more detailed analysis to the tunneling preference. It reflects the real situation in Chinese listed companies. Our paper gives support to the optimization of internal governance structure of listed companies in China and improvement of corporation's operation. Our paper also gives support to the perfection of the relevant legal system and regulation which will protect investor's interests.