Abstract
How does the legal environment influence investors’ distinguishing between related-party transactions that are part of the ‘coinsurance’ strategy of a business group and those enabling the ultimate controller to expropriate minority shareholders? Using a longitudinal (2008–2015) dataset of loan guarantees offered by Chinese publicly listed firms to their parent firms or subsidiaries and stock market responses, I find an exacerbated negative effect on the stock price of corporate governance structures, incentivizing the ultimate controller to expropriate minority shareholders, and stronger positive effect of corporate governance structures, indicating the monitoring of controlling shareholders in regions where the legal environment is less developed. The results reveal the important role of the local institutional environment in influencing how investors interpret related-party transactions.
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