Abstract
This study contextualizes the agency theory perspective in the Chinese setting to better understand the determinants of tunneling by controlling shareholders, a well-known form of principal-principal (PP) conflicts in corporate governance. Specifically, we examine how owner identity, managerial agency, and subnational institutional environments individually and collectively shape the severity of tunneling in Chinese publicly listed firms from 2005 to 2010. The empirical analysis shows that local governments and private enterprises tunneled more wealth from their respective listed subsidiaries than did central government agencies. Further, the severity of tunneling was greater in companies with higher managerial agency costs, especially those controlled by local governments. Finally, the intensity of tunneling was found to be negatively associated with the institutional quality of the subnational regions in which the listed firms resided, particularly those controlled by private entities. Our study serves to enrich the burgeoning literature on PP conflicts in corporate governance research.
Similar content being viewed by others
References
Aguilera, R. V., Filatotchev, I., Gospel, H., & Jackson, G. 2008. An organizational approach to comparative corporate governance: Costs, contingencies, and complementarities. Organization Science, 19(3): 475–492.
Anderson, R., & Reeb, D. 2004. Board composition: Balancing family influence in S&P 500 firms. Administrative Science Quarterly, 49(2): 209–237.
Ang, J. S., Cole, R. A., & Lin, J. W. 2000. Agency costs and ownership structure. Journal of Finance, 55(1): 81–106.
Bae, K., Kang, J., & Lee, I. 2006. Business groups and tunneling: Evidence from private securities offerings by Korean chaebols. Journal of Finance, 61(5): 2415–2449.
Baumol, W. J. 1990. Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5): 893–921.
Brødsgaard, K. E. 2012. Politics and business group formation in China: The Party in control?. China Quarterly, 211: 624–648.
Chan, H. S. 2004. Cadre personnel management in China: The Nomenklatura system, 1990–1998. China Quarterly, 179: 703–734.
Coffee, J. C. 2001. Do norms matter? A cross-country evaluation. University of Pennsylvania Law Review, 149(6): 2151–2177.
Cuervo-Cazurra, A. 2006. Business groups and their types. Asia Pacific Journal of Management, 23(4): 419–437.
Dharwadkar, R., George, G., & Brandes, P. 2000. Privatization in emerging economies: An agency theory perspective. Academy of Management Review, 25(3): 650–669.
Ding, Y., Zhang, H., & Zhang, J. 2007. Private vs state ownership and earnings management: Evidence from Chinese listed companies. Corporate Governance: An International Review, 15(2): 223–238.
Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 2008. The law and economics of self-dealing. Journal of Financial Economics, 88(3): 430–465.
Du, J., Lu, Y., & Tao, Z. 2008. Economic institutions and FDI location choice: Evidence from US multinationals in China. Journal of Comparative Economics, 36(3): 412–429.
Durnev, A., & Kim, E. H. 2005. To steal or not to steal: Firm attributes, legal environment, and valuation. Journal of Finance, 60(3): 1461–1493.
Faccio, M., Lang, L. H. P., & Young, L. 2001. Dividends and expropriation. American Economic Review, 91(1): 54–78.
Fan, G., Wang, X., & Zhu, H. 2011. National Economic Research Institute index of marketization of China’s provinces. Beijing: Economic Science Press.
Feinerman, J. V. 2007. New hope for corporate governance in China?. China Quarterly, 191: 590–612.
Firth, M., Rui, O. M., & Wu, W. 2011. The effects of political connections and state ownership on corporate litigation in China. Journal of Law and Economics, 54(3): 573–607.
Franks, J., Mayer, C., & Rossi, S. 2009. Ownership: Evolution and regulation. Review of Financial Studies, 22(10): 4009–4056.
Gold, T., Guthrie, D., & Wank, D. (Eds.) 2002. Social connections in China: Institutions, culture, and the changing nature of guanxi. Cambridge: Cambridge University Press.
Green, S. 2003. The development of China’s stock market, 1984–2002: Equity politics and market institutions. London: Routledge Curzon.
Haß, L. H., Johan, S., & Müller, M. A. 2016. The effectiveness of public enforcement: Evidence from the resolution of tunneling in China. Journal of Business Ethics, 134(4): 649–668.
Hausman, J. A. 1978. Specification tests in econometrics. Econometrica, 46(6): 1251–1271.
Hu, H. W., & Cui, L. 2014. Outward foreign direct investment of publicly listed firms from China: A corporate governance perspective. International Business Review, 23(4): 750–760.
Hu, H. W., Tam, O. K., & Tan, M. G.-S. 2010. Internal governance mechanisms and firm performance in China. Asia Pacific Journal of Management, 27(4): 727–749.
Huang, Y. 2002. Managing Chinese bureaucrats: An institutional economics perspective. Political Studies, 50(1): 61–79.
Jensen, M. C., & Meckling, W. H. 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4): 305–360.
Jian, M., & Wong, T. J. 2010. Propping through related party transactions. Review of Accounting Studies, 15(1): 70–105.
Jiang, F., & Kim, K. A. 2015. Corporate governance in China: A modern perspective. Journal of Corporate Finance, 32: 190–216.
Jiang, G., Lee, C. M. C., & Yue, H. 2010. Tunneling through intercorporate loans: The China experience. Journal of Financial Economics, 98(1): 1–20.
Johnson, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 2000. Tunneling. American Economic Review, 90(2): 22–27.
La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. 1999. Corporate ownership around the world. Journal of Finance, 54(2): 471–518.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. 2000. Investor protection and corporate governance. Journal of Financial Economics, 58(1–2): 3–27.
Li, H., & Zhou, L.-A. 2005. Political turnover and economic performance: The incentive role of personnel control in China. Journal of Public Economics, 89(9–10): 1743–1762.
Li, M. H., Cui, L., & Lu, J. 2014. Varieties in state capitalism: Outward FDI strategies of central and local state-owned enterprises from emerging economy countries. Journal of International Business Studies, 45(8): 980–1004.
Lieberthal, K. G., & Lampton, D. M. (Eds.) 1992. Bureaucracy, politics, and decision making in post-Mao China. Berkeley: University of California Press.
Liebman, B. L., & Milhaupt, C. J. 2008. Reputational sanctions in China’s securities market. Columbia Law Review, 108(4): 929–983.
Lin, L.-W., & Milhaupt, C. J. 2013. We are the (national) champions: Understanding the mechanisms of state capitalism in China. Stanford Law Review, 65(4): 697–759.
Liu, G., & Sun, P. 2005. The class of shareholdings and its impacts on corporate performance—A case of state shareholding composition in Chinese public corporations. Corporate Governance: An International Review, 13(1): 46–59.
Liu, Q., & Lu, Z. 2007. Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective. Journal of Corporate Finance, 13(5): 881–906.
Lo, A. W. Y., Wong, R. M. K., & Firth, M. 2010. Can corporate governance deter management from manipulating earnings? Evidence from related-party sales transactions in China. Journal of Corporate Finance, 16(2): 225–235.
Luo, J.-H., Wan, D.-F., Cai, D., & Liu, H. 2013. Multiple large shareholder structure and governance: The role of shareholder numbers, contest for control, and formal institutions in Chinese family firms. Management and Organization Review, 9(2): 265–294.
Peng, M. W., & Jiang, Y. 2010. Institutions behind family ownership and control in large firms. Journal of Management Studies, 47(2): 253–273.
Peng, M. W., & Sauerwald, S. 2013. Corporate governance and principal–principal conflicts. In M. Wright, D. Siegel, K. Keasey, & I. Filatotchev (Eds.). The Oxford handbook of corporate governance: 658–672. Oxford: Oxford University Press.
Qian, M., & Yeung, B. 2015. Bank financing and corporate governance. Journal of Corporate Finance, 32: 258–270.
Sauerwald, S., & Peng, M. W. 2013. Informal institutions, shareholder coalitions, and principal–principal conflicts. Asia Pacific Journal of Management, 30(3): 853–870.
Schulze, W. S., Lubatkin, M. H., Dino, R., & Buchholtz, A. K. 2001. Agency relationships in family firms: Theory and evidence. Organization Science, 12(2): 99–116.
Shi, W., Sun, S. L., & Peng, M. W. 2012. Sub-national institutional contingencies, network positions, and IJV partner selection. Journal of Management Studies, 49(7): 1221–1245.
Shih, V., Adolph, C., & Liu, M. 2012. Getting ahead in the Communist Party: Explaining the advancement of central committee members in China. American Political Science Review, 106(1): 166–187.
Shleifer, A. 1998. State versus private ownership. Journal of Economic Perspectives, 12(4): 133–150.
Shleifer, A., & Vishny, R. W. 1997. A survey of corporate governance. Journal of Finance, 52(2): 737–783.
Singh, M., & Davidson, W. N. 2003. Agency costs, ownership structure and corporate governance mechanisms. Journal of Banking & Finance, 27(5): 793–816.
Sun, P., Mellahi, K., & Liu, G. S. 2011. Corporate governance failure and contingent political resources in transition economies: A longitudinal case study. Asia Pacific Journal of Management, 28(4): 853–879.
Sun, P., Qu, Z., & Liao, Z. 2018. How and when do subnational institutions matter for R&D investment? Evidence from the Chinese pharmaceutical sector. IEEE Transactions on Engineering Management, 65(3): 379–391.
Tam, O. K., & Hu, H. W. 2006. Supervisory boards in Chinese corporate governance. In L. S. Ho, & R. Ash (Eds.). China, Hong Kong and the world economy: Study on globalization: 327–347. New York: Palgrave-Macmillan.
Wang, H., & Qian, C. 2011. Corporate philanthropy and corporate financial performance: The roles of stakeholder response and political access. Academy of Management Journal, 54(6): 1159–1181.
Wooldridge, J. M. 2002. Econometric analysis of cross section and panel data. Cambridge: MIT Press.
World Bank. 2008. Doing business in China 2008. Washington, DC: The World Bank Group.
Wu, J., Xu, D., & Phan, P. H. 2011. The effects of ownership concentration and corporate debt on corporate divestitures in Chinese listed firms. Asia Pacific Journal of Management, 28(1): 95–114.
Xu, D., & Meyer, K. E. 2013. Linking theory and context: “Strategy research in emerging economies” after Wright et al. (2005). Journal of Management Studies, 50(7): 1322–1346.
Yafeh, Y., & Yosha, O. 2003. Large shareholders and banks: Who monitors and how?. Economic Journal, 113(484): 128–146.
Yiu, D. W., Chen, X., & Xu, Y. 2013. Corporate governance in business groups. In M. Wright, D. Siegel, K. Keasey, & I. Filatotchev (Eds.). The Oxford handbook of corporate governance: 465–488. Oxford: Oxford University Press.
Yiu, D. W., Lu, Y., Bruton, G. D., & Hoskisson, R. E. 2007. Business groups: An integrated model to focus future research. Journal of Management Studies, 44(8): 1551–1579.
Yiu, D. W., Xu, Y., & Wan, W. P. 2014. The deterrence effects of vicarious punishments on corporate financial fraud. Organization Science, 25(5): 1549–1571.
Yoshikawa, T., & Hu, H. W. 2017. Organizational citizenship behaviors of directors: An integrated framework of director role-identity and boardroom structure. Journal of Business Ethics, 143(1): 99–109.
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. 2008. Corporate governance in emerging economies: A review of the principal–principal perspective. Journal of Management Studies, 45(1): 196–220.
Acknowledgements
We are indebted to Daphne Yiu (Senior Editor) and the anonymous reviewers for their insightful and constructive comments. We also acknowledge the audience of our presentation on the Strategic Management Society 32nd Annual International Conference in Prague, Czech, 2012, for their comments on an early version of the paper. Pei Sun acknowledges financial supports from China’s National Nature Science Foundation (grant no. 71672040) and the Shanghai Shuguang Scholar Program.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Hu, H.W., Sun, P. What determines the severity of tunneling in China?. Asia Pac J Manag 36, 161–184 (2019). https://doi.org/10.1007/s10490-018-9582-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10490-018-9582-z