Tunneling or propping: Evidence from connected transactions in China

Winnie Qian Peng, K. C.John Wei, Zhishu Yang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

158 Citations (Scopus)

Abstract

Friedman et al. (2003) develop a model in which, in equilibrium, controlling shareholders may choose either tunneling or propping of their listed companies depending on the magnitude of an adverse shock and the magnitude of the private benefits of control. In this paper, we employ connected transaction data from China to test the implications of their model. We hypothesize that, when listed companies are financially healthy (in financial distress), their controlling shareholders are more likely to conduct connected transactions to tunnel (prop up) their listed companies and the market reacts unfavorably (favorably) to the announcement of these transactions. Our empirical findings strongly support our hypotheses. We also find that all of the transaction types in our sample can be used for tunneling or propping depending on different financial situations of the firms. Finally, political connection is negatively associated with the announcement effect. Overall, our analysis supports Friedman et al.'s (2003) model by furnishing clear evidence for propping and tunneling to occur in the same company but at different times.

Original languageEnglish
Pages (from-to)306-325
Number of pages20
JournalJournal of Corporate Finance
Volume17
Issue number2
DOIs
Publication statusPublished - 1 Apr 2011
Externally publishedYes

Keywords

  • Chinese listed firms
  • Connected transactions
  • G32
  • G34
  • G38
  • Propping
  • Tunneling

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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