پشتیبانی توسط سهامداران کنترل، انتقال ثروت و عملکرد شرکت: شواهد از شرکت های فهرست شده چینی

Propping acts by controlling shareholders are common in Chinese listed firms. In this paper, we use data on related-party transactions of all listed Chinese firms from 2002 to 2008 to investigate the motivation behind controlling shareholders’ propping acts and subsequent wealth-transfer behavior and how both affect firm performance. We find that such institutional motivators as the maintenance of shell resources and qualification for refinancing have a significant effect on the propping behavior of controlling shareholders of Chinese listed firms and that such behavior is often followed by more serious tunneling when shareholders are driven by these motivators. Compared with non-state-owned firms, state-owned firms with the motivation to qualify for refinancing exhibit more severe tunneling after engaging in propping behavior. We also find that while propping by controlling shareholders improves a firm’s current operating performance, in firms whose controlling shareholders’ are motivated by the desire to maintain shell resources or obtain a refinancing qualification their performance declines in the following year because of subsequent tunneling. The results presented in this paper provide us with a better understanding of the relationship between propping and tunneling, controlling shareholders’ engagement in both and the consequences of that behavior.

Controlling shareholders’ expropriation of minority shareholders in listed firms has caused widespread concern in academic circles. Numerous studies show that controlling shareholders often profit from minority shareholders through related-party transactions, particularly in emerging economies with poor protection of minority shareholders. For example, La Porta et al., 1997, La Porta et al., 1998, La Porta et al., 1999, La Porta et al., 2000, Johnson et al., 2000 and Glaeser et al., 2001 and Chang (2003) all find that major shareholders are able to profit from minority shareholders through tunneling. Cheung et al. (2006) investigates related-party transactions between companies listed in Hong Kong and their controlling shareholders. They discover that firms that announce these transactions earn significantly lower excess returns than those that do not. They also find that firms listed in Hong Kong with ultimate shareholders in mainland China are more likely to expropriate from minority shareholders through related-party transactions. Controlling shareholders can engage in such expropriation by occupying or shifting funds, by obtaining related-party loans and by selling assets or products below market price to companies with which they enjoy a close relationship. Jiang et al. (2010) finds that controlling shareholders of listed firms tunnel from these firms by means of inter-corporate loans. Zhou et al. (2003) reveal that asset transactions between listed firms and their controlling shareholders are accompanied by transfers of wealth, with the asset revaluation rate of these transactions often higher than that between the firms and their minority shareholders. Li et al. (2005) report that tunneling operations also exist in mergers and acquisitions (M&A) in China. Chen et al. (2003) investigate controlling shareholders’ actions against minority shareholders and find that a high-dividend policy serves as a tool allowing these shareholders to shift resources from listed firms rather than increase firm value. In reality, however, controlling shareholders do not always carry out related-party transactions to expropriate wealth from minority shareholders. Propping is also common in listed firms in China. Controlling shareholders sometimes “prop up” the firms they control for some specific purpose. For instance, Air China, China Southern Airlines and China Eastern Airlines collectively lost RMB27.8 billion in 2008 after engaging in unsuccessful hedging exercises. To ease the financial distress of these firms, their controlling shareholder, the State-owned Assets Supervision and Administration Co. (SASAC), provided them with an instant capital injection.1 In the same year, Central Huijin Investment Ltd. injected funds into three major state-owned banks to satisfy their need for capital to better support listed companies. In 2009, after ST Zhangjiajie (000430) had a financial deficit for two consecutive years and investors had been warned of its delisting risk, the firm’s controlling shareholder issued a written announcement promising to provide funding in the following year. By means of M&As, related-party transactions and equity selling, the controlling shareholder of ST Zhujiang (000505) successfully helped the firm to escape delisting, putting on a show of uncapping, capping and uncapping again.2 Controlling shareholders most commonly prop up their listed firms when the firms are facing financial distress or are in need of funding.3 The means by which they engage in such propping actions are capital injections, loan guarantees, related-party transactions and other types of profit transfers that are in the opposite direction to tunneling operations. Intuitively, the entire process is not only harmless to minority shareholders but may even promote their well-being. Tunneling and propping are the two major behavioral patterns exhibited by controlling shareholders in conducting related-party transactions. The two opposing patterns may be found in the same company at different times. The question is when and to what extent shareholders choose to tunnel or prop. Friedman et al. (2003) develops a model suggesting that when a firm is facing a medium-level adverse impact, the optimal decision for its controlling shareholders is to prop up the firm. In cases with little or no adverse impact, in contrast, the optimal policy is to tunnel. In extreme cases, the optimal choice is complete tunneling. The model proposed by Friedman et al. (2003) helps us to better understand the essence of tunneling operations and the transfer of profits. However, as they themselves point out, there is insufficient evidence to support the theory of the transfer of profits. Friedman et al. (2003) also fail to provide evidence of tunneling. The stock market and its regulation in China provide us with an excellent opportunity to classify the extent and timing of tunneling and propping. Firms listed in China face two special risks: the risk of being delisted and the risk of losing their ability to issue new stocks. According to China Securities Regulatory Commission (CSRC) regulations, if a firm has a negative return on equity (ROE) for two consecutive years, it will be tagged for special treatment (ST) and face multiple transaction restrictions. If it continues to lose money in the third year, it will be delisted. Firms also face the risk of being deprived of the ability to issue new stocks because a firm that issues new stocks must have an average ROE no lower than 6% to be in compliance with existing regulations. There is a very strict threshold for firms to gain listing status or issue new stocks in China. When firms are delisted or deprived of the right to issue new stocks, their controlling shareholders suffer. Accordingly, when a firm is at risk of either, its controlling shareholders have strong incentives to prop it up. Once they have succeeded in doing so, these shareholders may then engage in tunneling through related-party transactions. In this study, we examine the transaction data of listed firms from 2002 to 2008 to investigate the propping and tunneling operations of their controlling shareholders. Propping includes the sale of goods, provision of credit guarantees and capital injections. We discover that institutional factors, the maintenance of “shells” and the attainment of refinancing qualifications to be the most common reasons for controlling shareholders to prop up their firms. After successfully doing so, these listed firms are found to suffer from tunneling. Wealth transfers from controlling shareholders can significantly improve firm performance. However, when firms are supported for shell maintenance and refinancing reasons, a significant decline in performance is seen in the following year owing to tunneling. A number of studies are closely related to our discussion in this paper. Jiang and Wang (2008), for example, find that controlling shareholders prop up earnings by using abnormal related sales when the listed firms they control are at risk of being delisted or deprived of their ability to refinance. Once such risks have been removed, however, significant cash transfers take place through related lending from the listed firms back to their controlling shareholders. The overall operation is in essence a way of manipulating earnings in reaction to specific regulations in the Chinese context. Liu and Lu (2007) are also of the opinion that earnings manipulation by Chinese listed firms is to a great extent caused by the need for tunneling on the part of their controlling shareholders. Peng et al. (2011) find that when listed firms are financially healthy, the market reacts unfavorably to the announcement of related-party transactions, thus indirectly suggesting that these transactions take place to expropriate from minority shareholders. When firms are in financial distress, in contrast, the market reacts favorably to such transactions, thus indicating that in this case they are taken as evidence of controlling shareholders propping up earnings. The work presented in this paper differs from the aforementioned studies in several respects. First, we provide evidence to support the model developed by Friedman et al. (2003). We also provide evidence on the timing and consequences of propping and tunneling operations. The difference between our study and that of Peng et al. (2011) is that rather than adopt direct measures as we do, they attempt to indirectly determine whether controlling shareholders had conducted propping or tunneling operations using the market’s reaction to related-party transactions disclosed at different times, whereas we identify the nature of these operations by observing the direction of related-party transactions.4 In this paper, we also confirm that shell maintenance and the attainment of a refinancing qualification are the two vital motivations for propping and tunneling operations. Second, we prove that controlling shareholders with these motivations tend to tunnel from their firms after propping them up. Previous studies, such as that of Jian and Wong (2010), test this relation, but they only take into account two specific forms of related-party transactions, that is, related-party sales and inter-corporate loans. However, as Peng et al. (2011) point out, propping and tunneling can be implemented through any type of related-party transaction. Therefore, in this paper, we define related-party transactions as the sale of goods, provision of guarantees, inter-corporate loans, equity transfers and asset transactions. We confirm that controlling shareholders with the motivation to maintain shell resources and/or obtain a refinancing qualification can carry out earnings manipulation using any form of related transaction to prop up and then tunnel from their firms. Third, this paper compares controlling shareholder behavior in three cases: the motivation for shell maintenance, the motivation to obtain a refinancing qualification and other motivations. The results show that subsequent wealth transfers (tunneling) after propping are significant only in the first two cases. Jian and Wong (2010) make no such distinction or comparison. Furthermore, they fail to consider the behavioral differences among the controlling shareholders of firms with different types of ownership. In this paper, in contrast, we compare the behavior of the controlling shareholders of state-owned and privately owned enterprises. We find that when the motivation is to obtain a refinancing qualification, controlling shareholders’ tunneling subsequent to propping is more prominent in state-owned enterprises than in their privately owned counterparts. Finally, our investigation of the influence of related-party transactions on firm performance further corroborates our rationale for using the direction of these transactions to measure propping and tunneling operations. The remainder of the paper is arranged as follows. Section 2 provides the background to our research and presents our research hypotheses. Section 3 describes the data, variables and sample. Section 4 presents analysis of our empirical results and Section 5 concludes the paper.

Propping is one of the most important types of behavior displayed by controlling shareholders. In this paper, we examine related-party transaction data for listed firms in China during the 2002–2008 period and investigate the intentions, consequences and mechanisms of controlling shareholders’ propping operations and their connections with tunneling behavior. We find the institution-driven intentions of shell resource maintenance and refinancing qualification to be the two most important reasons for the controlling shareholders of listed firms to prop up their firms. We also find that firms propped up for these reasons suffer tunneling in the following year. Supportive activities motivated by other goals are more likely to be long-lasting and are found not to be accompanied by significant wealth-transfer activities in the following year. Controlling shareholder propping can significantly improve firm performance in the current year, but when its motivation is shell maintenance or refinancing qualification, that performance will experience a significant decline in the following year because of controlling shareholders’ subsequent tunneling activities. The results of this paper show that controlling shareholders take different actions after propping depending on their motivation for it. Propping activities motivated by the two aforementioned institution-driven goals are usually transitory, whereas those that occur for other purposes are more sustainable. Therefore, the Chinese regulatory authorities should look more closely at the related-party transactions of listed firms, particularly those driven by the desire to maintain shell resources and qualify for refinancing, to better regulate the short-term activities of these firms’ controlling shareholders.