Abstract
It is widely believed that common-law legal systems are more protective of minority shareholders than are code-law legal systems. However, even in countries with high quality common-law legal systems and accounting standards, suspicious transactions between a firm and its controlling shareholder are reported every now and again. This study examines an alleged tunnelling transaction in Hong Kong market and aims to answer that how controlling shareholders circumvent a strong legal system to tunnel resources from firms. The results show that controlling shareholders carefully choose the timing and the content of disclosure to affect views of investors. The close relationship between controlling shareholders and inside directors also plays a key role in wining majority votes. The findings suggest that the legal systems per se, without an appropriate property rights structure, may not provide effective investor protection as expected.
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