The Research On Tunneling And Propping’s Effect On Corporate Performance And Market Value

Caused by the concentration of corporate ownership structure, the research ofcorporate governance has focused on the behavior of majority shareholder in recentyears. The minority shareholder tends to be "free rider" which could lead to thedeficiency of monitoring on managers, due to the high monitoring cost. However,the existence of majority shareholder could offset the phenomenon, and then reducethe agency cost caused by the separation of ownership and management in certainextent. Yet in order to maximize their own interest, majority shareholder wouldtake advantage of the right of control by tunneling the resource of corporate.Meanwhile, majority shareholder would also make use of their own resource to propthe company in some circumstances, for example, the company is trapped becauseof funds shortage or needs to meet the requirements of refinancing.The main emphasis of this paper is tunneling and propping’s effect oncorporate performance and market value, both spot and lag. The paper is organizedas follows. Firstly, the existing literature is reviewed. Secondly, theoretical analysisis used to explain the alignment effect, the entrenchment effect, the meaning, originand pattern of tunneling and propping, and the influence on corporate performanceand market value of tunneling and propping. Thirdly, descriptive analysis is used toanalyze the current tunneling and propping situation in public listed companies inChina. Meanwhile, the corporate performance and market value of different typesof companies are also tested. In addition, the spot and lag influence of tunnelingand propping behavior on corporate performance and market value are tested byplotting, single factor analysis and regression analysis. At last, the paper isconcluded.Because of the limits on materials and data, in this paper, the two-wayoccupancy of non-business net funds is used to measure tunneling and propping.The following conclusions are the main result of this paper. Firstly, tunnelingwould weaken corporate performance, and the influence is spot. Secondly, proppingwould improve corporate performance, but the influence is slowly. Thirdly,compared with companies which are only tunneled or propped, performancevolatility of companies which are both tunneled and propped is smaller Fourthly,the more serious the tunneling is, the less the corporate market value would be in the current year and the next year. Fifthly, the influence of propping on corporatemarket value is weaker than that of tunneling. In addition, the more propping, theless corporate market value would be in the current year.