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
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
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.
Posted by Amy CHAN Wen Yi, Year 4 undergrad at the School of Accountancy, Singapore Management University
Peregrine Financial Group’s former Chief Executive Russell Wasendorf Sr. pleaded guilty on Monday to embezzling more than $100 million from customers of his futures brokerage, lying to regulators to cover his tracks, and mail fraud. Continue reading
Elusive Middle Ground in Punishment of White-Collar Criminals
By PETER J. HENNING
JANUARY 12, 2015 3:27 PM January 12, 2015 3:27 pm 1 Comment
The punishment meted out to criminals convicted of white-collar crimes like fraud and tax evasion can seem confusing to the public. A low-level accountant once received nearly 25 years for inflating with the company’s revenue while a wealthy entrepreneur received probation for hiding millions of dollars in a secret Swiss bank account.
To help judges make decisions that don’t seem so arbitrary, federal sentencing guidelines are in place to provide a structure for determining an appropriate sentence. Judges have the final say about what punishment to give, yet even with the guidelines, there is persistent criticism that they need to be overhauled to better fit the crimes. Continue reading
Read this together with “Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols” (Link)
SEC, stock exchange to plug private placement loopholes
THE NATION January 13, 2015 1:00 am
THE STOCK EXCHANGE of Thailand and the Securities and Exchange Commission are looking for ways to plug loopholes in regulations regarding private placements. SET president Kesara Manchusree said listed companies seeking to increase their capital had issued more shares through private placements (PP) last year, which was in line with the overall market situation. PP is a channel for listed firms to find strategic partners to help enhance their potential.
Regarding an observation that some firms had conducted many private placements geared towards the same groups of investors, Kesara said the SET had to consider whether such transactions were appropriate to the objective of enhancing the firms’ future potential.
“If so, the PP is all right and not unusual,” she said.
The SET and SEC are discussing ways to close loopholes to prevent retail investors from being taken advantage of, and putting them on an equal footing with public investors. Continue reading
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
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.
Read the article on Hanjin Group together with “Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups” (Link), “Tunneling through intercorporate loans: The China experience” (Link) and “Expropriation through loan guarantees to related parties: Evidence from China” (Link)
Updated : 2015-01-12 17:58
Increase in Hanjin Group debt raising liquidity concerns
By Lee Hyo-sik
Hanjin Group, a logistics-centered, family-controlled conglomerate, has seen its debt soar over the past few years as Korean Air and other group units borrowed money to prop up their sagging businesses.
Hanjin’s debt has grown at the fastest pace among the nation’s top 10 business groups since the 2008 global financial crisis, and has the highest debt-to-equity ratio, raising the possibility that it may face a liquidity crunch. Continue reading
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: firstname.lastname@example.org.
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.
Journal of Financial Economics
Volume 98, Issue 1, October 2010, Pages 1–20
Tunneling through intercorporate loans: The China experience ☆
Guohua Jianga, Charles M.C. Leeb, , , Heng Yuea
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.
Journal of Banking & Finance
Volume 33, Issue 1, January 2009, Pages 141–156
Expropriation through loan guarantees to related parties: Evidence from China ☆
Henk Berkmana, , Rebel A. Coleb, , , Lawrence J. Fuc,
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.