What determines the severity of tunneling in China?

Abstract

This study contextualizes the agency theory perspective in the Chinese setting to better understand the determinants of tunneling by controlling shareholders, a well-known form of principal-principal (PP) conflicts in corporate governance. Specifically, we examine how owner identity, managerial agency, and subnational institutional environments individually and collectively shape the severity of tunneling in Chinese publicly listed firms from 2005 to 2010. The empirical analysis shows that local governments and private enterprises tunneled more wealth from their respective listed subsidiaries than did central government agencies. Further, the severity of tunneling was greater in companies with higher managerial agency costs, especially those controlled by local governments. Finally, the intensity of tunneling was found to be negatively associated with the institutional quality of the subnational regions in which the listed firms resided, particularly those controlled by private entities. Our study serves to enrich the burgeoning literature on PP conflicts in corporate governance research.