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.

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/jbfa.12078/abstract

Journal of Business Finance & Accounting

Volume 41, Issue 7-8, pages 831–866, September/October 2014

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Joseph P.H. Fan, Feng Guan, Zengquan Li and Yong George Yang^†,*

Abstract

The measurement difficulties arising from relationship-based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high-level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business-politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm’s economic performance. In turn, a break in a political relationship due to anti-corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms’ earnings management behavior or disclosure policies.