China's Listed Companies Actually Control Hollowed Out And Support Empirical Analysis

To better explain the financing behavior of listed companies in China stock market, this paper puts together "tunneling" and "propping" activities under survey. Based on the multi-period dynamic model of Friedman(2003), we try to figure out the intrinsic desicion-making mechanism of actual controllers of listed companies, that is, why and when will actual controllers tunnel source out of the firm or prop up their firms. Based on that, according to specific situation in China stock market, the paper provides empirical evidence of the model conclusion, and compares whether those factors influencing "tunneling" behavior affect "propping" activity symmetrically.Essentially, "tunneling" and "propping" are interest transferring actions of different directions that actual controllers take to maximize their multi-period revenue. With weak investor protection, the seperation of ownership and control motivates actual controller to tunnel resources out of firms. In order to maintain their privilege of tunneling in the future, under some circumstances, actual controllers may prop up firms using their own private resources. However, if the firm is too terrible to be rallied, actual controller may loot the firm and let it collapse.Empirical evidence shows that "tunneling" and "propping" are actually not symmetric. When the return of capital of publically traded firm is lower, the opportunity cost of "tunneling" is lower accordingly, which encourages "tunnelling". However, when actual controller decides to prop up the firm, as the return of capital is higher, the extent of propping becomes much more modest. As the gap between ownership and control goes larger, "tunneling" gets worse. This kind of relation does not hold in the case of "propping". Weak investor protection motivates "tunneling", whereas better legal institution encourges actual controller to prop up the firm so as to attract investment. "Tunneling" is negatively linked with debt, which has nothing to do with "propping" though, according to empirical test.There is no empirical evidence to show who has larger motivation to tunnel source out of firms, state-owned companies or private ones, as they face different institutional backgrounds and business conditions. The intrinsic reason of "tunneling" is not Dual-Class equity structure, but seperation of ownership and control. Therefore, Dual-Class equity structure reform can not erase tunneling problem on its own. The key to restrain actual controllers' behavior lies in well-developed corporate governance and investor protection.