Product market competition and controlling shareholders' tunneling: Evidence from China

Abstract

This paper provides evidence supporting the disciplinary role of product market competition in controlling shareholders' tunneling. We use the regulation‐induced IPO suspensions in China as shocks to product market competition. With a generalized DID design, we find that reduced product market competition threat, induced by rivals' IPO suspension, increases incumbents' inter‐corporate loans by 0.4 percentage points (pp) and the probability of committing a capital occupation violation by 3.1 pp. The effect of IPO suspension on tunneling is weakened when the product market is highly competitive and more pronounced for companies with problematic agency problems and loose governance mechanisms. Furthermore, we document a reverse effect when IPO suspensions end. This study contributes to the literature on product market competition's disciplinary role by presenting evidence supporting a plausibly causal effect of competition and controlling shareholders' tunneling.