Capital-Market Liberalization and Controlling Shareholders’ Tunneling—Experimental Research in the Context of “Mainland China-Hong Kong Stock Connect”

Abstract

ABSTRACT Foreign investors attracted by capital-market liberalization may either inhibit controlling shareholdersʻ tunneling due to the influence of ‘long-term value investmentʻ or exacerbate it due to the effect of ‘short-term price speculation.ʻ Therefore, it is unclear whether and how capital-market liberalization will eventually influence controlling shareholdersʻ tunneling. We take the implementation of Shanghai-Hong Kong Stock Connect (SHHKSC) and Shenzhen-Hong Kong Stock Connect (SZHKSC) in Chinaʻs capital market as a quasi-natural experiment and use a difference-in-differences (DID) model to identify the causal effect of capital-market liberalization on controlling shareholdersʻ tunneling. The results show that capital-market liberalization significantly reduces controlling shareholdersʻ tunneling. Improving the quality of information disclosure and corporate governance as the predominant channels that allow capital-market liberalization to reduce controlling shareholdersʻ tunneling. Further analysis shows that the effect is more pronounced when companies are private, when the level of external marketization is low and when product market competition is weak. This study enriches and supplements the literature that the impact of capital-market liberalization on the real economy and provides policy insights. Regulators should improve the supervision of information disclosure and corporate governance to decrease controlling shareholdersʻ tunneling. (Jel codes:D82;G34;G38)