Does the market understand the ex ante risk of expropriation by controlling shareholders?

Yan Leung Stephen CHEUNG, P. Raghavendra RAU, Aris STOURAITIS, Weiqiang TAN

Research output: Contribution to journalArticlespeer-review

Abstract

We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm’s balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts. Copyright © 2021 Elsevier Inc. – All Rights Reserved.
Original languageEnglish
JournalJournal of Corporate Finance
Early online date06 Apr 2021
Publication statusE-pub ahead of print - 06 Apr 2021

Citation

Cheung, Y.-L., Rau, P. R., Stouraitis, A., & Tan, W. (2021). Does the market understand the ex ante risk of expropriation by controlling shareholders? Journal of Corporate Finance. Advance online publication. https://ssrn.com/abstract=3818025

Keywords

  • International corporate governance
  • Expropriation
  • Operating assets
  • Cash holdings
  • Intra-group loans
  • Pyramids
  • Tunneling

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