Capital-Market Liberalization and Controlling Shareholders’ Tunneling—Experimental Research in the Context of “Mainland China-Hong Kong Stock Connect”

ABSTRACT

Foreign investors attracted by capital-market liberalization may either inhibit controlling shareholdersʻ tunneling due to the influence of ‘long-term value investmentʻ or exacerbate it due to the effect of ‘short-term price speculation.ʻ Therefore, it is unclear whether and how capital-market liberalization will eventually influence controlling shareholdersʻ tunneling. We take the implementation of Shanghai-Hong Kong Stock Connect (SHHKSC) and Shenzhen-Hong Kong Stock Connect (SZHKSC) in Chinaʻs capital market as a quasi-natural experiment and use a difference-in-differences (DID) model to identify the causal effect of capital-market liberalization on controlling shareholdersʻ tunneling. The results show that capital-market liberalization significantly reduces controlling shareholdersʻ tunneling. Improving the quality of information disclosure and corporate governance as the predominant channels that allow capital-market liberalization to reduce controlling shareholdersʻ tunneling. Further analysis shows that the effect is more pronounced when companies are private, when the level of external marketization is low and when product market competition is weak. This study enriches and supplements the literature that the impact of capital-market liberalization on the real economy and provides policy insights. Regulators should improve the supervision of information disclosure and corporate governance to decrease controlling shareholdersʻ tunneling. (Jel codes:D82;G34;G38)

KEYWORDS:

• Capital-Market liberalization
• controlling shareholdersʻ tunneling
• quasi-Natural experiment
• information quality
• corporate governance

Acknowledgments

We thank the editor and the reviewers. We acknowledge the National Natural Science Foundation of China (No.71762024, No.72062027).

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 Jinping Xi, as the representative of the 18th Central Committee, submitted a report to the 19th National Congress of the Communist Party of China on 18 October 2017

2 If a single foreign investor holds the shares of a listed company, the shareholding ratio should not exceed 10% of the total shares of the company; the total shareholding ratio of all foreign investors to the shares of a single listed company should not exceed 30% of the total shares of that listed company.

3 SHHKSC includes Shanghai Stock Connect (SHSC) and Hong Kong Stock Connect (HKSC), while SZHKSC includes Shenzhen Stock Connect (SZSC) and Hong Kong Stock Connect (HKSC). SHSC refers to investors of Hong Kong or foreign can trade stocks listed on the Shanghai Stock Exchange within the scope of the SHHKSC through the securities trading service company set up by the Hong Kong Stock Exchange in Shanghai. SZSC refers to investors of Hong Kong or foreign can trade stocks listed on the Shenzhen Stock Exchange within the scope of the SZHKSC through the securities trading service company set up by the Hong Kong Stock Exchange in Shenzhen. HKSC refers to mainland investors can trade stocks listed on the Hong Kong Exchange within the scope of the SHHKSC and SZHKSC through the securities trading service company set up by the Mainland Stock Exchange in Hong Kong. All the funds that buy SHSC and SZSC are known as Northbound flows, and the mainland funds that buy HKSC are known as Southbound funds.

4 Gong, Wang, and Yang (2021) use data from 1999 to 2006, among them, board independence reform in 2001 year. Chinaʻs capital market is heavily influenced by policy, therefore, the impact of policy on the company is stronger in that period, however, our sample is from 2009–2019. However, with the development of capital markets, especially the opening of Shanghai-Hong Kong Stock Connect in 2014 and Shenzhen-Hong Kong Stock Connect in 2016 made the original system no longer applicable to the new situation, which may be the reason why the relationship between independent directors and controlling shareholdersʻ tunneling in this paper is different from Gongʻs.

5 Chinaʻs provincial marketization index compiled by XiaoLu Wang and Gang Fang in 2017.

6 As the marketization index ends in 2016, we use one method to fill up the remaining years; so, the 2017 index is equal to the 2016 index plus the average value of the increased index in 2014, 2015, and 2016 compared with the previous year, and the other years are the same. All the samples are divided into two groups according to the median values of market index.