Corporate Ownership, Debt, and Expropriation: Evidence from China

http://www.cba.uri.edu/research/workingpapers/documents/2011/WP14_2011.pdf

Posted by Hannah YAP Qing, Year 4 undergrad at the School of Accountancy, Singapore Management University

Corporate Ownership, Debt, and Expropriation: Evidence from China

Yunxia Bai, Bing-Xuan Lin, Yaping Wang, Liansheng Wu Guanghua

Abstract

We provide direct evidence on the dark side of leverage and offer new insights regarding the role of debt in corporate governance. Using a sample of Chinese state-owned enterprises that have experienced a transfer of controlling rights, we find a positive and significant relationship between expropriation and debt usage. Firms controlled by private block shareholders tend to have higher leverage due to excessive expropriation via debt. The evidence we document also suggests that in a weak legal environment, privatization alone will not resolve the agency problem faced by minority shareholders. On the contrary, the agency problem between the controlling shareholder and minority shareholders escalates after privatization.

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