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.