Interesting commentary by Nureen CHAN Wan Wei (Year 4 accounting undergrad at SMU): https://asianextractor.com/2015/01/13/tunneling-through-intercorporate-loans-the-china-experience/comment-page-1/#comment-94

KB: So investors will not invest in firms with poor corporate governance (e.g. asymmetric information) that are more susceptible to accounting fraud and expropriation risk?

– Quick comments on Gianetti and Simonov (2006, JF): Individuals connected with company insiders are more likely to invest in weak corporate governance companies as they are able to extract private benefits or access private information to earn higher returns. Investors’ preferences for stocks are not driven only by conventional proxies for risk!

– Quick comments on Morck et al (2005): In emerging markets, investors invest in family-controlled firms, even if they knew that there are adverse selection costs and that there are potential expropriation of assets, because they perceive that it is far better to earn some returns with these dominant family firms when few alternatives are available

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.00879.x/abstract

Which Investors Fear Expropriation? Evidence from Investors’ Portfolio Choices

MARIASSUNTA GIANNETTI and ANDREI SIMONOV^*

The Journal of Finance

Volume 61, Issue 3, pages 1507–1547, June 2006

ABSTRACT

Using a data set that provides unprecedented detail on investors’ stockholdings, we analyze whether investors take the quality of corporate governance into account when selecting stocks. We find that all categories of investors (domestic and foreign, institutional and small individual) who generally enjoy only security benefits are reluctant to invest in companies with weak corporate governance. In contrast, individuals connected with company insiders are more likely to invest in weak corporate governance companies. These findings suggest that it is important to distinguish between investors who enjoy private benefits or access private information, and investors who enjoy only security benefits.

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.01062.x/abstract

Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

JAE-SEUNG BAEK, JUN-KOO KANG and INMOO LEE^*

The Journal of Finance

Volume 61, Issue 5, pages 2415–2449, October 2006

ABSTRACT

We examine whether equity-linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups.

http://rfs.oxfordjournals.org.libproxy.smu.edu.sg/content/21/5/2015.abstract?sid=5b0ee01d-15e5-466f-999e-18651558a530

Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Gil S. Bae Korea University

Youngsoon S. Cheon Chungang University

Jun-Koo Kang Nanyang Technological University and Michigan State University

Address correspondence to Jun-Koo Kang, Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798; telephone:(517) 353-3065; fax: (517) 432-1080; e-mail: kangju@bus.msu.edu.

Abstract

Using earnings announcement events made by firms belonging to Korean chaebols, we examine propping within a chaebol. Consistent with the market’s ex ante valuation of intragroup propping, we find that the announcement of increased (decreased) earnings by a chaebol-affiliated firm has a positive (negative) effect on the market value of other nonannouncing affiliates. The sensitivity of the change in the market value of nonannouncing affiliates to abnormal returns for the announcing firms is higher if the cash flow right of the announcing firm’s controlling shareholder is higher. The sensitivity is also higher if the announcing firm is larger, performs well, and has a higher debt guarantee ratio.

http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S0304405X10001145

Journal of Financial Economics

Volume 98, Issue 1, October 2010, Pages 1–20

Tunneling through intercorporate loans: The China experience ^☆

Guohua Jiang^a, Charles M.C. Lee^b, , , Heng Yue^a

Abstract

This study investigates a particularly brazen form of corporate abuse, in which controlling shareholders use intercorporate loans to siphon billions of RMB from hundreds of Chinese listed companies during the 1996–2006 period. We document the nature and extent of these transactions, evaluate their economic consequences, examine factors that affect their cross-sectional severity, and report on the mitigating roles of auditors, institutional investors, and regulators. Collectively, our findings shed light on the severity of the minority shareholder expropriation problem in China, as well as the relative efficacy of various legal and extra-legal governance mechanisms in that country.

http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S0378426607003408

Journal of Banking & Finance

Volume 33, Issue 1, January 2009, Pages 141–156

Expropriation through loan guarantees to related parties: Evidence from China ^☆

Henk Berkman^a, , Rebel A. Cole^b, , , Lawrence J. Fu^c, 

Abstract

We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. In addition, we use this sample to provide new evidence on the relation between tunneling and proxies for firm value and financial performance. We find that Tobin’s Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.