Tunneling or Propping: Evidence from Connected Transactions in China
Friedman et al. (2003) develop a simple model in which, in equilibrium, controlling shareholders may choose either tunneling or propping depending on the magnitude of an adverse shock and the magnitude of the private benefit of control. In this paper, we provide direct empirical evidence to test the implications of the model by studying connected transactions in China. We argue that when a listed firm is in sound financial conditions, controlling shareholders are more likely to use connected transactions to expropriate the listed firm to benefit other member firms (i.e., tunneling); on the other hand, when a company is facing the risk of delisting or losing rights to issue new equities, controlling shareholders are more likely to use connected transactions to prop the listed firms so that they can continue to enjoy the private benefit of the listing status or to access to the financial market (i.e., propping). The results from the connected transaction data during the 1998 – 2004 period support our hypotheses. More specifically, we find that there is a negative market reaction to connected transactions announcements, when the listed firms are in sound financial conditions, which supports the tunneling argument. In contrast, we find that there is a positive market reaction to the announced connected transactions, when the listed firms face the risk of delisting, which supports the propping argument.
Connected transactions tunneling propping Chinese listed firms
Winnie Peng K.C. John Wei Zhishu Yang
Department of Finance Hong Kong University of Science and Technology Clear Water Bay, Kowloon, Hong Department of Economics Tsinghua University Beijing, PRC
国际会议
昆明
英文
1-39
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）