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| Foreign Ownership and Controlling Shareholder's Tunneling |
| ZHANG Hao, TAN Wenqian, HAN Yonghui
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School of Finance,Guangdong University of Foreign Studies;
International School of Business Finance, Sun Yat-sen University;
Guangdong Institute for International Strategies, Guangdong University of Foreign Studies |
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Abstract There is a significant information asymmetry between controlling shareholders and minority shareholders, which may result in controlling shareholders exploiting their effective control to transfer the firm's assets and profits, thereby undermining the interests of minority shareholders. Due to unique historical reasons and institutional backgrounds, Chinese listed companies are characterized by a concentrated ownership structure, as opposed to the dispersed ownership structure prevalent in Western capital markets. As a result, controlling shareholders have effective control over the company, which provides convenience for tunneling activities. Therefore, how to effectively curb the tunneling of controlling shareholders and effectively protect the interests of minority shareholders has thus become a critical focus for promoting the high-quality development of listed companies in China.
Since China's accession to the WTO, the gradual opening up of the capital market has enabled a large number of foreign companies to enter the Chinese market through joint ventures, cooperation and equity participation, thereby injecting fresh impetus into the governance of listed companies. Given their strong financial resources and rich investment management expertise, foreign investors play a crucial role in improving the corporate governance of the companies, including improved information transparency, enhanced quality of accounting disclosure and reduced earnings management. However, the question remains: can foreign investors use their advantages to effectively monitor and constrain the tunneling of controlling shareholders？ The existing literature has not thoroughly and comprehensively explored this issue.
Based on the aforementioned ideas, we manually collect data on the top ten shareholders of Chinese A-share listed companies from 2003 to 2022, and comprehensively examine the impact and mechanism of foreign investor ownership on the tunneling behavior of controlling shareholders under the background of capital market liberalizationg. The main findings are as follows. First, foreign ownership can improve the quality of information disclosure in the firms they invest in and increase the attention of analysts and media, thereby effectively constraining the tunneling behavior of controlling shareholders. Second, foreign ownership from countries with high governance standards, as well as foreign direct investors and foreign institutional investors, have a stronger inhibitory effect on the tunneling behavior of controlling shareholders. Third, independent foreign institutional investors, stable foreign institutional investors, and foreign institutional investors who have signed the UN Principles for Responsible Investment (UN PRI) have a more pronounced impact. Finally, in non-state-owned firms, firms with poor governance, periods of high economic policy uncertainty, and in regions with poor legal regulation, the impact of foreign ownership is more significant.
Our paper makes the following three key contributions. First, we provide a novel approach to addressing the governance of controlling shareholders' tunneling. Previous studies qualitatively examined the changes in controlling shareholders' tunneling before and after the opening of the Shanghai-Hong Kong Stock and Shenzhen-Hong Kong Stock Connect programs, but were unable to distinguish between different types of foreign investors. We quantitatively assess the extent to which increases in foreign ownership can influence controlling shareholders' tunneling. In addition, we compare the effects of FDI and QFII, foreign institutional investors versus foreign individual investors, different ownership scales, different types of foreign institutional investors, and foreign investors from different countries on the tunneling of controlling shareholders. This enriches the literature on the governance of insider behavior. Second, we provide a new perspective for studying the impact of foreign ownership. Previous studies have not reached a consistent conclusion on the impact of foreign ownership. Some studies argue that foreign investors in emerging markets act like “locusts”, prioritizing short-term profits without regard for long-term corporate development. Conversely, other studies suggest that foreign investors export their advanced management experience to improve corporate governance of the firms. We confirm that foreign ownership can play a regulatory role, exerting a positive governance effect, which contribute to a deeper understanding of the economic implications of capital market openness policies. Third, existing literature on foreign investors in China has primarily focused on QFIIs, lacking a comprehensive examination of the influence of foreign capital on corporate governance. We manually collected data on the shareholding ratios and their origin countries of foreign investors in listed companies to provide a more accurate characterization of the impact of foreign capital on controlling shareholders' tunneling.
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Received: 17 May 2024
Published: 01 November 2024
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